Posts by: WST Expert 1
Re: Distressed Debt Model
When evaluating HY bonds, the core model makes a lot of sense but shouldn't one also evaluate HY bonds from the perspective of the corporation going into bankruptcy? Shouldn't one focus much on the downside which is why I was thinking (incorrectly) tying in the distressed model as a method of evalu... Read More
When evaluating HY bonds, the core model makes a lot of sense but shouldn't one also evaluate HY bonds from the perspective of the corporation going into bankruptcy? Shouldn't one focus much on the downside which is why I was thinking (incorrectly) tying in the distressed model as a method of evalu... Read More
RE: Building in divestitures/future acquisitions/stock buybacks
The following are the implications involved in each of the 3 scenarios: (i) Divestiture – Depending on whether it is a stock or asset sale will determine what the tax implications are to determine the net proceeds received by the selling company. The net proceeds will impact the financial stat... Read More
The following are the implications involved in each of the 3 scenarios: (i) Divestiture – Depending on whether it is a stock or asset sale will determine what the tax implications are to determine the net proceeds received by the selling company. The net proceeds will impact the financial stat... Read More
RE: Complex LBO: mandatory repayment for existing debt tranch 1
If there is a 10K filing it will be certain what the mandatory repayments are since itis required to be disclosed. You can find that info under the Debt footnote or Commitments and Contingents footnote (generally both actually). If its publicly traded there will almost definitely be a public filing ... Read More
If there is a 10K filing it will be certain what the mandatory repayments are since itis required to be disclosed. You can find that info under the Debt footnote or Commitments and Contingents footnote (generally both actually). If its publicly traded there will almost definitely be a public filing ... Read More
Re: Valuation Question
What's the number days inventory outstanding? If short number days, then revolver is ok. Commercial paper and revolvers are short term funding needs, like inv and a/r. However, if long lead time to produce and sell, then WACC. (Think GM - needs more permanent source of capital since they sell crap... Read More
What's the number days inventory outstanding? If short number days, then revolver is ok. Commercial paper and revolvers are short term funding needs, like inv and a/r. However, if long lead time to produce and sell, then WACC. (Think GM - needs more permanent source of capital since they sell crap... Read More
Re: Distressed Debt Model
High yield bonds do not necessarily mean bankruptcy is imminent. If bankruptcy is a possibility, then yes, you need the Distressed Modeling course (fulcrum, etc) and of course Valuation, sum of the parts, liquidation, asset sale, etc. Our Covenants & Credit Agreements course is not yet availab... Read More
High yield bonds do not necessarily mean bankruptcy is imminent. If bankruptcy is a possibility, then yes, you need the Distressed Modeling course (fulcrum, etc) and of course Valuation, sum of the parts, liquidation, asset sale, etc. Our Covenants & Credit Agreements course is not yet availab... Read More
RE: Using different debt securities to finance an LBO
Term loans (aka bank debt) are less expensive for a Company because they require a lower interest rate. However, they require regular mandatory paydowns, which decreases the Company’s available cash. Senior notes and senior discount notes are advantageous in that you defer paying them back until m... Read More
Term loans (aka bank debt) are less expensive for a Company because they require a lower interest rate. However, they require regular mandatory paydowns, which decreases the Company’s available cash. Senior notes and senior discount notes are advantageous in that you defer paying them back until m... Read More
Re: IRR decline
Here's a short summary of our discussion. The exit multiples are hypothetical. Rationale for Trends with Different Exit Multiples: – 8x: you are selling in Y1 at a much lower multiple than you bought in (huge neg). As you de-lever, you build equity quickly at the beginning, net debt pay down in Y... Read More
Here's a short summary of our discussion. The exit multiples are hypothetical. Rationale for Trends with Different Exit Multiples: – 8x: you are selling in Y1 at a much lower multiple than you bought in (huge neg). As you de-lever, you build equity quickly at the beginning, net debt pay down in Y... Read More
QUESTION: RE: LBO modeling: when a company you’re analyzing in order to do an LBO has capital leases on its balance sheet, what’s the proper way to reflect that in the sources and uses? That is: let’s assume they have $20mm of capital leases on the balance sheet right now (IE pre transacti... QUESTION:
RE: LBO modeling: when a company you’re analyzing in order to do an LBO has capital leases on its balance sheet, what’s the proper way to reflect that in the sources and uses?
That is: let’s assume they have $20mm of capital leases on the balance sheet right now (IE pre transaction). If we’re going to keep their capital leases outstanding post-LBO, should our LBO sources have a line item called “Assume capital leases : $20mm”, so that our sources and uses balance? and then, post-transaction, we’ll have a Capital leases line item on the balance sheet, as well as in our debt schedule.
RESPONSE:
Are they buying out the cap leases? If not, then it doesn't come into the picture at all.
QUESTION:
Let's assume they're leaving the cap leases in place.
So are you saying that the sources and uses will not show the cap leases at all?!?!
If that's the case, then when I calculate the LBO entry multiple, I'll have to add cap leases to the financing sources, in order to accurately calculate the LBO's TEV/EBITDA multiple, right?
RESPONSE:
Remember for standalone valuation, cap leases not included.
QUESTION:
Okay - but lets assume the MD wants to show cap leases as part of the entry LBO multiple. Would the correct way to model it be: show the cap leases in the uses as "Capital Leases assumed" and show them in the sources as "capital leases assumed"?
RESPONSE:
No keep it simple. Just say Debt/EBITDA of 6x (or whatever). Then in debt capacity say: Debt + Cap leases = Total debt
Then total x multiple is new capacity. No need to have cap leases in S&U
QUESTION:
Good stuff. To be clear: you're saying "Look, Sources and Uses are just about what are you buying, and what are you using to buy it. TEV multiples are a totally different concept, in which you say: how much debt am I raising + debt already outstanding on the company + equity paid - cash on the balance sheet right after the transaction occurs = TEV, then divide that by 2007E EBITDA, and there's your entry multiple."
RESPONSE:
Yes, correct. However you asked abt leverage - so, Debt/EBITDA and the question is, debt includes cap leases not part of S&U.
QUESTION:
Understood. And, the TEV for an LBO should be total debt + total preferred + minority interest - cash PRO FORMA FOR TRANSACTION, right?
RESPONSE:
Well, supposedly its always "excess cash" but rarely is that additional adjustment made. So do whatever ur vp/md wants on that - minor point anyways. The key is not multiples but S&U.
QUESTION:
Btw, I noticed that the JCP LBO model we did in training does not have an Asset Writeup assumption cell. I thought that goodwill = equity purchase price + M&A fees - (asset writeup + tangible net book value), no?
RESPONSE:
Correct - we did FMV step up in super-advanced merger not JCP. Why? Bc once LBO, its not technically GAAP necessary. When it IPOs later, whole new financials anwyay.
QUESTION:
Understood, but doesn't the asset writeup generate incremental depreciation expense, which is tax deductible? IE wouldn't we want to model that incremental depreciation out, to calculate a lower income tax bill?
RESPONSE:
GAAP FMV writeup is independent of tax writeoff.
Hence a large deferred tax liability is created to match the difference. The explanation is much longer. So the short answer is, nope!
Longer answer - this could be a good continuing education topic for a luncheon discussion.
QUESTION:
1. is amoritzation of intangibles tax deductible?
2. is interest expense on capital leases tax deductible?
3. if a company has capital leases, but does not show interest expense in its internal company model, where else could they be showing the interest expense on capital leases?
RESPONSE:
1) amortization of IDENTIFIABLE intangibles is usually tax deductible
2) both interest expense and the depreciation on capital leases are tax deductible (legit expense!)
3) the capital lease expense could be burIEd within interest expense (IE debt) or depreciation. Read More