LBO Lab · Level 7: How far can EBITDA fall?

Time 0:00 / 10:00 targetHints 0Base 1200 pts

Case brief · Level 7 of 8

Penrose Learning Group

Vocational training

Penrose is a fictional training provider financed with a senior loan (3.5x) and cash-pay mezzanine (1.5x), 5.0x in total. The leverage covenant is net debt / EBITDA of no more than 5.0x, tested at every year end, with 50% of excess cash swept.

The downside switch is on with a 10% EBITDA haircut. How much worse can it get before the covenant trips?

LTM revenue / EBITDA: $380m / $91.2m (24.0%)
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: 8.5x / 8.5x
Senior debt: 3.5x at 8.5%, 2% amort.
Sub / mezzanine: 1.5x at 11.0% cash
Cash sweep: 50%
Senior interest on: opening balance
Downside case: EBITDA -10% from Yr 1
Covenants: ND/EBITDA <= 5.0x; cover >= 1.5x

What is the maximum EBITDA haircut (applied from Year 1) before net debt / EBITDA exceeds the 5.0x covenant in any year? Enter the haircut as a percent, e.g. 14.

Tolerance +/-1%

	A	B	C	D	E	F	G
1	Model ($m)
2	Year	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
3
4	Operating forecast
5	Revenue	380.0	395.2	411.0	427.4	444.5	462.3
6	EBITDA margin (before scenario haircut)	24.0%	24.5%	25.0%	25.5%	26.0%	26.5%
7	EBITDA	91.2	87.1	92.5	98.1	104.0	110.3
8	D&A		13.8	14.4	15.0	15.6	16.2
9	Capex		11.9	12.3	12.8	13.3	13.9
10	Investment in net working capital		1.5	1.6	1.6	1.7	1.8
11
12	Interest, tax and cash flow
13	Senior cash interest		27.1	25.8	24.0	21.7	18.8
14	Sub cash interest		15.0	15.0	15.0	15.0	15.0
15	Sub PIK interest (non-cash)		0.0	0.0	0.0	0.0	0.0
16	Pre-tax profit		31.1	37.2	44.1	51.8	60.2
17	Cash tax		7.8	9.3	11.0	12.9	15.1
18	Free cash flow after interest and tax		23.8	28.4	33.6	39.3	45.7
19	Mandatory senior amortisation		6.4	6.4	6.4	6.4	6.4
20	Cash available for sweep (after minimum cash)		17.4	30.7	42.5	54.2	66.4
21	Cash sweep to senior		8.7	15.3	21.3	27.1	33.2
22
23	Senior debt
24	Opening balance		319.2	304.1	282.4	254.7	221.2
25	less: mandatory amortisation		(6.4)	(6.4)	(6.4)	(6.4)	(6.4)
26	less: cash sweep		(8.7)	(15.3)	(21.3)	(27.1)	(33.2)
27	Closing balance	319.2	304.1	282.4	254.7	221.2	181.6
28
29	Sub / mezzanine debt (bullet)
30	Opening balance		136.8	136.8	136.8	136.8	136.8
31	plus: PIK interest accrued		0.0	0.0	0.0	0.0	0.0
32	Closing balance	136.8	136.8	136.8	136.8	136.8	136.8
33
34	Cash
35	Opening cash		10.0	18.7	25.3	31.3	37.1
36	Free cash flow less repayments		8.7	6.6	5.9	5.8	6.1
37	Closing cash	10.0	18.7	25.3	31.3	37.1	43.2
38
39	Credit statistics and covenants
40	Net debt (senior + sub - cash)	446.0	422.2	393.8	360.3	320.9	275.2
41	Net debt / EBITDA	4.89x	4.84x	4.26x	3.67x	3.09x	2.50x
42	EBITDA / cash interest		2.07x	2.26x	2.51x	2.83x	3.26x
43	Leverage covenant		OK	OK	OK	OK	OK
44	Interest cover covenant		OK	OK	OK	OK	OK
45
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