LBO Lab · Level 6: Downside: how much senior debt?

Time 0:00 / 10:00 targetHints 0Base 1100 pts

Case brief · Level 6 of 8

Tidewater Cold Storage

Temperature-controlled logistics

Tidewater is a fictional cold-chain operator. Lenders will only commit if interest cover (EBITDA / cash interest) stays at or above 2.0x in EVERY year of a downside case that cuts EBITDA by 30% from Year 1.

The sponsor wants the largest senior loan that still passes. The scenario switch on Inputs is already set to the downside.

LTM revenue / EBITDA: $500m / $90.0m (18.0%)
Growth / margin step: 4.0% p.a. / +50 bps p.a.
Capex / D&A, % rev.: 3.0% / 3.5%
Tax rate: 25%
Entry / exit multiple: 8.0x / 8.0x
Senior debt: 5.0x at 9.0%
Cash sweep: 0%
Senior interest on: opening balance
Downside case: EBITDA -30% from Yr 1
Covenants: ND/EBITDA <= 7.0x; cover >= 2.0x

What is the maximum senior leverage (x LTM EBITDA) that keeps the lowest interest cover at or above 2.0x in the downside case?

Tolerance +/-0.1x

	A	B	C	D	E	F	G
1	Sources & uses, exit and returns ($m)
2
3	Sources & uses at close
4	Enterprise value (entry multiple x LTM EBITDA)	720.0
5	Transaction fees	14.4
6	Minimum cash funded	10.0
7	Total uses	744.4
8	Senior debt	450.0
9	Sub / mezzanine debt	0.0
10	Total equity (balancing figure)	294.4
11	Total sources	744.4
12	Total debt / LTM EBITDA at close	5.00x
13
14	Exit at end of Year 5
15	Year 5 EBITDA	87.3
16	Exit enterprise value	698.4
17	less: net debt at exit	373.6
18	Exit equity value	324.7
19	less: management incentive pool (% of gain)	0.0
20	Equity value to shareholders after MIP	324.7
21
22	Sponsor returns
23	Year	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
24	Sponsor equity invested (after management rollover)	294.4
25	Management rollover equity	0.0
26	Sponsor exit proceeds	324.7
27	Sponsor cash flows	(294.4)	0.0	0.0	0.0	0.0	324.7
28	Sponsor IRR	2.0%
29	Sponsor MOIC	1.10x
30	Total equity MOIC (before MIP)	1.10x
31	Total equity IRR (before MIP)	2.0%
32
33	Covenant summary (Years 1-5)
34	Peak net debt / EBITDA	6.43x
35	Lowest EBITDA / cash interest	1.66x
36	Covenant status	BREACH
37
38

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