LBO Lab · Level 4: Average balance interest

Time 0:00 / 8:00 targetHints 0Base 900 pts

Case brief · Level 4 of 8

Marlow Fieldwork Services

Utility field services

Marlow is a fictional field-services contractor. All excess cash sweeps to the term loan, and the model charges interest on the AVERAGE of opening and closing balances. That creates a circular reference (interest depends on the sweep, which depends on interest), so the workbook has iterative calculation switched on.

The credit committee wants to know how much the averaging convention flatters returns.

LTM revenue / EBITDA: $450m / $81.0m (18.0%)
Growth / margin step: 5.0% p.a. / +50 bps p.a.
Capex / D&A, % rev.: 3.0% / 3.5%
Tax rate: 25%
Entry / exit multiple: 8.5x / 8.5x
Senior debt: 4.5x at 10.0%, 2% amort.
Cash sweep: 100%
Senior interest on: average balance

How many basis points of sponsor IRR does the average-balance convention add compared with charging interest on the opening balance? (Set Senior interest basis to 1, then back to 2.)

Tolerance +/-8bps

	A	B	C
1	Inputs ($m unless stated)		Blue = hard-coded input (shaded = you may change it); black = formula; green = link to another sheet
2
3	Operating case
4	LTM revenue ($m)	450.0
5	LTM EBITDA margin	18.0%
6	Revenue growth p.a.	5.0%
7	EBITDA margin change p.a.	0.5%	added to the prior-year margin
8	D&A, % of revenue	3.5%
9	Capex, % of revenue	3.0%
10	NWC investment, % of change in revenue	10.0%
11	Tax rate	25.0%	on EBITDA - D&A - interest (cash + PIK)
12
13	Transaction
14	Entry EV / LTM EBITDA	8.5x
15	Exit EV / EBITDA (end of Year 5)	8.5x
16	Transaction fees, % of EV	2.0%
17	Minimum cash, funded at close ($m)	10.0
18
19	Debt
20	Senior debt, x LTM EBITDA	4.5x
21	Senior interest rate	10.0%
22	Senior mandatory amortisation, % of original p.a.	2.0%
23	Cash sweep, % of excess cash to senior	100%
24	Sub / mezzanine debt, x LTM EBITDA	0.0x
25	Sub cash interest rate	0.0%	on opening balance
26	Sub PIK interest rate	0.0%	accrues on opening balance, added to principal
27	Senior interest basis (1 = opening, 2 = average)	2	2 is circular: iterative calculation is on
28
29	Equity
30	Management rollover, % of total equity	0.0%
31	Management incentive pool, % of equity gain	0.0%
32
33	Scenario & covenants
34	Scenario (1 = base, 2 = downside)	1
35	Downside: EBITDA haircut from Year 1	0.0%
36	Covenant: max net debt / EBITDA	6.0x
37	Covenant: min EBITDA / cash interest	2.0x
38
39

Iterative calc on (14 passes)TextReady