Hello, my name's Ollie. I work for Financial Edge and this is a series of small lectures you could call it or webinars to examine how the LBO works. There are four of these in total, okay? And they form a series and they go week by week. And today we'll be talking about deal structure. So who are the players, what do they want? How does the funding work? And how much funding can you get? Next week will be a deeper dive into those debt schedules. So how does the debt get repaid? Who gets priority? How does that all get structured? How do you reflect it in an advance more the week after that is returns and exits. So how exactly do you, and, and let me just grab these so I can show you, you know how do we exit? So here we are, deal structure next week, debt schedule, then exit. So September 22nd and that'll be my colleague Maria who talks about the types of exits that you could expect from the LBO. And then there's another one, okay? And where we are LBO stub period modeling the week after. And that will be to do with the advanced model where we say, well what if the LBO happens midyear? What does that do to the model? because most of the models that we've been looking at so far, assuming you've been on one of our summer programs, have been looking at a nice neat end of year acquisition, which perhaps, is not that real worldy. Okay? So let's get started and again, hello, just in case you, dialed in a bit later there and if you've got any questions, just jump in with the chat or the Q&A box. Actually completely happy with both. Now what we're gonna do is first off, let's have a look at the key players.

Okay, now I've been doing some highlighting already here, so lemme just get rid of that. That's from the morning's work and I forgot to get rid of it. Okay? So key players hopefully this is fairly straightforward revision for you. But if you've got your questions then let me know. What's gonna happen is, first off, this is an M&A infraction. So we'll have a target company and that target company is gonna be acquired and it's gonna be one of several target companies that are of interest to a PE fund private equity. And these will become what are call portcos portfolio companies and they'll be acquired with a combination of debt and equity and the PE fund will stop up the equity. And then banks and other debt players, it's important to note that, okay, other debt players as well will stump up the debt.

And you can see I've made some notes here this morning. The equity is gonna hopefully be fairly small and the debt is gonna be pretty big. And you can see some suggested ranges there, you know, in the range of 20 to 50% equity and 50 to 80% debt.

And the whole point of an LBO, well arguably the whole point of an LBO is to create volatility of returns. And that sounds like a bad thing. Usually, volatility is associated with a negative aspect of business. But actually we're looking to create volatility here. And the volatility we're looking to create is that the debt holders will only ever get their debt back. So when the exit happens and target or Portco is sold or exited in some way, then the debt holders will get their debt back, plus they will have earned some interest and fees and things. But the equity holders, although they've put very little in what they get out is any excess return. Because excess return by nature is rightfully the equity holders. And so that means that if things go badly, the equity holders get hit first, they probably lose an awful lot. But if they go well, then the equity holders get all the upside and that means that the returns are volatile, including possible upside. And that means that at the end of all of this, the yield could be very effective that the equity holders whereas the yield for the debt holders just debt. So they're gonna be perhaps lending at fairly high rates because this is quite leveraged, but much lower returns.

Now we've talked about the banks and it's important to just note there are other debt players as well. So institutions, things like that, we'll look at that more later. Then within equity, let's talk about the players and get a different, okay, so within equity you've got the general partners, okay? Now these generally the PE firm executives and so they'll be steering the ship, they'll be working hard to find targets, they'll be administrating those targets, they'll be, um, purchasing them, they'll be seeking capital, they'll be trying to get the lowest cost of capital and so they're doing an awful lot of work. Now what that means is they're also gonna expect quite a lot of return and they're gonna generate that in one of two ways. They're gonna charge fees of two and carried interest of 20, you your classic two and 20 structure there. And that means that the returns, the equity will experience, disproportionate amount of them will go to the general partners, okay? Then you've got the limited partners and they're gonna be, contributing equity as well. And actually they're gonna be contributing most of the equity, okay? But they will be getting the returns as well, but probably a more modest level. And that's because they're taking less risk, they're working less hard, they're more passive in this. And you can see that's things like pension funds, wealth individuals, maybe family offices, things like that. Okay? So that is your key players. Um, hopefully that makes sense. I'm just gonna keep eye, eye on the Q&A pod, see if there's any questions, chat, pod, see there's any questions, can't see anything.

Alright, what are we gonna do next? Let's have a look at the intermediate model and have a look at sources and uses. Okay? So you'll find the intermediate model in the downloads if you wanna look along with me or you can just take a look on my screen, it's up to you. And the intermediate model is what you will have done if you've come to one of our big sessions in the summer or perhaps one of our public classrooms. Okay? So let's take a look around the model. You can see that this is beverages. So we go through the accounting of several beverages companies.

We then make a model for Red Bull. So Red Bull's the target.

We then use training comps, okay? And we come up with a valuation of Red Bull using trading comps.

They move for an IPO, do DCF, okay? And we come to, valuation using DCF.

Okay? Transaction comps. So maybe we just a strategic buyer, And then M&A, so again, a strategic buyer.

And then finally LBO. And that's what we're obviously gonna concentrate on most in this session. If we look at the way the LBO model works, it relies very heavily on the general model. So if you go to revenue, you can see it's based on the Red Bull model.

And for example, CapEx is also based on the Red Bull model. So an LBO model is reliant on a good general forecast and that that's true of a basic or an advanced LBO model.

And then you can see the overall aim is to say, how much debt can we pay down? And then how much debt will there be left crossing the bridge, what will that mean for our, our equity value? Zoom in a bit.

And then dependent on the exit, so here the exit is year three, what will be the yield and then a bit of sensitivity afterwards. So given the assumptions in this model, the yield is 20, which is okay yield. And then that would then be distributed to the LPs and the GPs in a complicated way. If we go back up to the inputs, so these are the inputs. You can see I've highlighted some areas and the highlighted areas are perhaps the areas where we could develop it a bit further and we can talk about it, talk about some real deals, and then look at an advanced model.

So the first thing is if we have a look, we've got here source uses, which we're gonna spend a fair bit of time on.

You can see the uses, apparently the enterprise value, okay? Now that enterprise value will represent the equity and the net debt.

And what that means is it implies the refinancing and we might see that shown differently elsewhere.

We should hopefully be aware that EV is equal to all of the operational assets, which will be fueled by all the financial liabilities, which would be equity plus net debt. So by implication, there's a refinancing going on, we need to find some money for the refinancing, that's a use. And then we've got fees, but it's not really clear what kind of fees. They're very simplistic.

You can see the fees are just a flat fee of enterprise value. So again, arguably very simplistic and really depending on how you think about it, there's either two or three items in the uses, okay? Two being EV plus fees. Three, if you would split that ev into equity plus net debt.

Now over on the sources, similarly, it is quite simple, okay, we've got senior debt and that looks like bank debt.

It's not really clear what it is, it's not really clear when it's due. It's not really clear what the covenants are, how it works when it gets repaid, and the unsecured notes, which are public debt. So it bonds notes is the keyword. Debt. Again, it's not really clear what that is when the redemption is and what the sorts of terms are attached to that. And then we've got equity, which is a bit of a plug, which is normal, fair enough. But this is also fairly simplistic. Okay? Then finally over here, if we take a look in the inputs, you can see that senior debt is being created as a spread on the risk-free rate. And this is a bit like how we price a bond, okay? Or maybe cost of debt in a WACC. And that's not how bank loans or bank debt is priced. So again, this is a little bit simplistic and so we could perhaps improve on them now because we've simplified the debt so much. And you can see here, you know, we have 11 million of senior debt when it comes to the waterfall. So I'm referring to this bit down here where it says, right, what can we spare for the cash sweep? Then when you get to the beginning senior debt balance, you start working at it. You see that? Is that so you're sweeping all cash into senior debt. And then when it comes to the notes, we are sweeping everything into it after we're done with the, senior debt. And although it may be that you can repurchase the, the, the notes, it, it could be it, it's all very simplistic. Okay? And one thing I could show you is let's say cash available for debt repayment. Now I, I might break this now, so if I do apologies and I'll have to mess around, but let's say I forced this company, it's just having appalling year one. So I'm gonna plug minus 10,000 in. You're gonna see some funny things happening now I think. Okay? So I've given this company a terrible year and what's ended up happening is, oh gosh, look at that. In this model we're actually gonna borrow more.

So we're gonna borrow more senior debt and end up in the first year owing more senior debt. Then we're gonna plug away at it, okay? Then we're gonna plug away at it, then we're gonna plug away at it.

And so you see that this model is fairly easy to do some strange stuff with. There's no upper limit on the senior debt. There's no mandatory payments on the senior debt. Okay? Let's say I give this another terrible year here. See, what I'm gonna do is I'm just gonna borrow more on the senior debt in that year, then there's nothing left to pay the bond. And actually apparently the bond holders don't mind waiting. So if I just give, keep giving myself terrible years, so apparently the senior debt is happy just to keep giving me more and more money and then the bonds are just happy to keep waiting forever.

Now clearly what I'm doing is a bit silly, right? So I'm just tearing this model apart just to demonstrate its weaknesses. But you can see the weaknesses are definitely there and that's because this is what I call an intermediate model. And what you'd need to do is make sure that nothing silly's happening. So you need to do some checks. If you built this model, make sure that it's all working sensibly. It's a fine model for an intermediate, okay? And it would be okay as long as you kept your eye on everything. But we'll see when we have a look at more advanced stuff that we could program it maybe to be a bit smarter and principally one of the ways we could program it is by disaggregating some of this stuff and giving it more of a kind of mandatory and accelerated element.

Okay? I'm gonna move away from this and look at a couple of real deal documents. Again, I'm just gonna check the Q&A and check the chat. I can't see anything, okay? So feel free to just jump in and give any questions or comments you might have. Now let's have a look at a couple of real deals.

You see I've already been doing some highlights from this morning.

All right, so this is pattern, okay? And it's Paternoster Holding, which is a mysterious sounding company and they're gonna acquire Wittur and you can see wit's logo up here.

And Paternoster is an investment vehicle or a fund that is being controlled by Bain, which is a very well known private equity player. And then Wittur is a German, elevator component manufacturer, okay? So it's well known in its sphere, but I doubt anybody's heard of it. And this is an LBO and what you're looking at here is an offering of the senior notes. So this is a bond prospectus, so it's going out to market to try and raise funds 225 mil for the deal. And because the prospectus describes the deal, they've gotta tell us about the deal, which is very helpful for us and because we can use it to find out some stuff about how LBOs work and what sort of debt tends to get raised and what sort of sources and uses we might see in real deal documentation.

So if we go to source uses, okay, I just rub this stuff out so I can read oh no, oh gosh, there we go. Sorry that was behaving quite strangely.

That's good. Okay, so first off, off if you came to us in the summer and if you started talking to us about kind of what types of debt then you would've learned about these types of debt most likely, okay? And the types of debt you would've learned about are term loan, A term loan Bs, maybe CS, and then public debt and then mezzanine. And those are all your longer term debts. And then hopefully you would've understood what the RCF is being a revolving credit facility. Now if you did something like debt capacity with us, then you would've started looking at amortizing loans, okay? So notice that term loan A they amortize, which is to say, you know, you give me uh, $10 million and I'll give you $2.5 million every year for five years. And you can see that's starting to chip away at the principal and the interest from the first year. So it's, it's low risk for the lender. And so this is typically very low risk senior secured with maintenance covenants.

And so this would be usually issued by banks, okay? Conservative banks who want low risk and low return.

Now you also would've learnt that term loan Bs are a thing and term loan BS tend not to amortize, okay? What they do is they have a bullet repayment typically after about seven years or so, and in the meantime they're paying cash interest. So in terms of the bank or the lender, should I say the lender's getting regular interest and then after seven years they get the principal back. So you can see the risk is much higher to them. And so the pricing is higher.

And you can see with the Wittur deal there is no term loan A, they just jump straight in on B.

And this is something that's very, very common in more modern LBOs. Okay? Over the course of the last 20 or 30 years, term loan Bs have become less competitive in terms of pricing.

Banks have been subject to ever more regulations around their capitalization. And that means that non-bank lenders such as institutions such as insurers, mutual funds, that kind of thing, are able to offer term loan BS at very aggressive competitive rates. And it means that lots of deals you might see jump straight in at B for the term loans you might not see a, then you can see notes offered. And that's actually the subject of this document that we're looking at. And then you can see the equity and if you look roughly at the breakdown it, it's roughly a third and two thirds. So very lever.

Now in terms of uses, we jump over to uses. You can see we've got a shareholder's equity, we've got refinancing, which they're choosing to show as a uses of fund here, which I actually quite like, you know, they're not lumping it together as an ev, which we showed in our model. And then we've got transaction costs. But if we read carefully and note four, we can see there's something called an OID in here, okay? And this is something that we would tend to add into our more advanced models because it has some interesting accounting and it's a little bit more complicated than just saying fee gets expensed.

Okay? So what I wanted to do here was really um, highlight two things. Number one, term loan Bs are very prevalent in terms of term loans these days. And number two OIDs are a thing and we should be able to deal with 'em and add them to our models eventually.

And now you may not know what an OID is, so right now what we're gonna do is talk about that, okay? I'll use this slide here.

So os in terms of what they actually are, you can think about 'em as two things. Either they're a fee, just a fee, you know, you give me a hundred million dollars and I immediately give you $1 million back. So you may as well have given me $99 million net.

Okay? The other thing it could be is a discount at issue, okay? And this would often be the case if you've got debt instruments whose reward is not interest or a coupon, but some sort of difference between issue and redemption, like a zero coupon bond or something like that.

Now they're both treated the same way and they're both called OID. So if somebody says OID to you, it's not immediately clear what they mean. They could mean a fee or they could mean a discounted issue. Doesn't matter.

Now what's gonna happen is in terms of the model, we're gonna have the OID as a, so we're gonna have the OID as use and it's also got special accounting as it amortizes, which we won't cover so much today, okay? And you can see how that works down here.

Now I know it's getting a little messy up here, but I wanna keep writing.

Let's say we've got something like a thousand million low and a 10 million OID, okay? So that's a 1% fee perhaps.

And what's gonna happen is you're gonna get your a thousand million low, but you're only really getting 990 million cash. And what's gonna happen is that's gonna be reflected by the fact that the OID is a negative liability, okay? So there's the OID initially as a negative liability and it's gonna sit against the a hundred million and net out to nine 90. The thing is, eventually you're not gonna pay me back nine 90, well I'm paying you, I've forgotten who's who. Okay? The, the ending liability is your billionaire. So what happens in the accounts, and this is where it gets tricky and this is why we can't just expense the OID is the accounting is because the debt has a finite life. And here you can see by implication it's five years, five lots of two, the OID slowly gets released to the income statement via amortization, a little bit like an intangible. And that means that eventually the loan will be sitting at a thousand million and that's the mechanism of an OID. And of course that creates some tricky, tricky modeling because some of this will be cash, some of it will be non-cash. The liability's now moving around and we have a use of funds for our table at the front. So that's the first bit we're gonna see. That's a bit tricky in the advanced model.

Okay? I wanna move on and have a look at a second low, bond documentation and a second deal. Again, I'm just gonna keep an eye on the Q&A nothing there. Keep an eye on the chat, can't see anything. Again, I'll encourage you if you've got any questions, just to chuck it in. Always good to hear from you. So the second one we're gonna look at, sorry it's really slowed down to a grinding halt here if you wonder what I'm doing.

Okay, so the second one we can see is Verallia, which is the target, and that is a French glass packaging company and it's gonna be acquired by Horizon, which is really Apollo Global, which again is a big PE player and they just happen to be raising another 225 million. It's not the same bond, it's a different bond. And if we take a look at the source and uses of this one just to see another one, you can see that, really all I wanted to do with this one was to show that there could be a little complexity around the sources.

First thing to say is that term loan B is completely dominant in this deal in terms of debt. And so it shows again that term loan B and institutional debt on the whole is very popular in LBOs. We've got some bonds, okay, some of which are secured, some of which appear not to be. And you can see the 2, 2 5 is what this document's about.

And we've got something called local debt, okay? Now local debt is often leases, okay? And they're being rolled over into the new capital structure.

Then we've got cash. And can you see that? Because over here the use of fund, this is net debt and presumably this cash is from somewhere else. It's not just sitting around. Okay? And you can see that it's a little bit of what you might call supply chain finance, okay? Or asset-based lending or something like that. So you've got non-recourse factoring. So they're gonna sell the receivables and they're gonna sell the receivables for 30 mil, whoops. 114, which is actually a fairly sizable amount of money. It's half the bond issuance that this prospectus is about. And then the rest of it's gonna come from equity. And in terms of breakdown, you can see that this one is very, very leveraged. It's something like one fifth equity, about 80% debt. So this one's got even higher leverage than the other one. And so you'd expect,

Saint-Gobain the target to be very cash generative to be awarded such high debt capacity. All right? So really just wanted to have a look at another deal now, just give you an example. Let you see some uh, source of uses. Now what are we gonna next? Let me just look, yeah, let's just round out that table that I was looking at before. So we already talked about term loan A, term loan B, and we used those documents to say term loan B has actually become much more prevalent. If we decided to go for public debt, then we'd be going for notes, okay? Notes tend to have higher rates than bank debt.

It's called the fixed income market. So it usually be fixed over its life. They might have longer maturities and tend to have bullet repayment as opposed to amortizing.

And it's generally a bit more difficult to call or prepay them as opposed to, you know, your amortization schedule or having some sort of acceleration here. Okay? And then within uh, bonds you would also have the same sort of trenching possible or subordination possible in terms of, covenants. Covenants tend to be a lot lower than they were maybe 20, 30 years ago. Even when you've got quite heavy covenants on bank debt, they tend to be covenant light and that's uh, a little bit jargon there. So we tend to see fewer and fewer covenants and that's often because these loans are gonna get packaged up and then sold to investors as part of collateralization. So they end up in all sorts of places, okay? Bonds tend to have lighter covenants anyway in that they're not being monitored as much as are being tacked to an event such as a takeover.

Okay? So that rounds that out.

Let's have a look where it's going next. Yeah, let's start looking at the um, advanced model.

Okay? So we're looking at the advanced model now and let's take a talk to or through it. So first off, we've got all of the admin stuff then because this is more complex, what we're gonna do now is instead of having your whole LBO on one tab the way we did with intermediate, we're gonna have the LBO spread amongst several tabs because each of the tabs is more complex.

Now we're gonna be spending quite a lot of time looking at the input. This is where you put your assumptions, okay? I don't wanna look at it too much now because it's what we're gonna be chatting about. We've then got a model without the LBO, okay? And the model is a regular forecast. It's got your three statements in it. So in that sense, nothing too unusual.

We then actually need an entire tab just for working out what's gonna go on with what's called the stop period, which is what the subject of the Felix live webinar is in three weeks time. It's quite complicated. And the stop period, just to give you a little bit of a sort of teaser of it, if you buy mid-year, then see here 30th of December is the, or sorry, end of the year, 31st of December is the fiscal year end. And the deal is happening three quarters the way through the year. So you get a pre-deal and a post-deal split of the f kind of final year, let's say, of ownership. And that causes a lot of complexity around the first column in whatever we are doing. So it means we've gotta rerun the entire deal model with a split and a stub and everything else gets this stub. It kind of infects the whole model and makes everything more difficult, but it makes it a much better, more advanced model. So if you're interested in stub, come back in three weeks, don't leave now there. Okay, next we've got the deal model. This is just like the normal model, but imagining the deal takes place and so it'll take things from uh, the rest of our work. It also takes the stop into account. We've then got the debt schedule, which is very complex. You can see it is way bigger than the debt schedule in our intermediate model. I think the debt schedule in our intermediate model was something like 20 rows. And the debt schedule here is, I think it's pushing about 200 rows or even longer. Yeah, so it's about 210 rows. And that's because we are gonna model more debt, more complex debt with more sensible assumptions, okay? And if you're interested in that, we'll do more work on that next week. That'll be me again. And then we've got a tab for returns and this is where we work out who gets what. Okay? So we get the mezzanine holders, we get equity holders, we get their IRRs. And then it could get even more complicated if you wanted to do carried interest with thresholds and things. So if you're interested in that, come back in two weeks, my colleague Maria will be doing a session on exits and returns.

Now what we are gonna do is we're gonna spend most of our time having a look at the inputs and a little bit of time look at debt schedule. And then if we have any time left, we'll talk about debt capacity.

Now what we'll do is just pretty much go line by line and we're not gonna build 'cause it would just take too long for this session. But we're just gonna look at everything and say, right, how's this different from the intermediate model and why are we doing it? Okay, so first off, we've got this idea of the stub, and like I said, it's complex, but we're not gonna talk about it today.

We've then got the acquisition, we've got the ev and by implication, because we're doing the ev, it's kind of saying, well, are we gonna refinance? We just left EV. Yes. But this model disaggregates the EV into equity and debt.

So it's got a bit more detail than the intermediate model.

You can see we've got an underfunded pension, which we haven't talked about yet.

And an underfunded pension, what's gonna happen is, let's say the target has got a defined benefit pension scheme, and remember a defined benefit pension scheme is a guaranteed outcome.

Yeah, I sometimes try and put hyphens in and so, okay, so it's a guaranteed outcome for the pensioner. And because there's a guaranteed outcome, you need a fund. And that fund will have assets which is separate from the company and the assets may be okay to cover most of the liabilities, but there could be a deficit. So what's happened is the mega accountants, the actuarials have come in and said, oh, I don't know, you investments aren't doing too well or people are living a bit longer, so you're gonna need to, put money in your fund and we think that you'll need 1100, otherwise you won't be able to fulfill your promises. And so at the point of the LBO, there's a lot of due diligence going on and so it's quite possible that the deficit becomes clearer. And here you can see there's a deficit of a hundred and that deficit will need to be plugged, okay? And so it is a use of funds.

We've then got the net debt, we, we've disaggregated it from the rest of the ev. So there is refinancing, taking on using target debt and target cash and we're gonna buy the target's equity. So, so far these two lines, no big surprises.

Then we've got that OID, okay? And you can see the OID is being dealt with separately from the transaction fees, so much more sophisticated model and the OID if I follow that, it's coming from the product of these numbers here and these numbers here.

So what this model does really nicely is source of funds actually does two jobs really. And number number one, it's the source of funds. But number two, it actually describes the debt in much more detail. Much more detail, okay? So if we take a look at it, you can see some of the debt has an OID and that OID is being churned via the amount into an absolute amount here. And that's cash that we're gonna have to find from somewhere because when we do our source of funds, we're gonna put the undiscounted amount in, so not reflecting the OID. And so the OID gets taken over here on the left, let's say in terms of source of funds. So if we move over to the right hand side now and just gonna pause, check the q and a, check the chat. I know I keep doing that and it's maybe getting a bit repetitive, but I just wanna make it clear that I'm very welcoming of questions. Don't see any, now you can see the source of funds, we've got an RCF, okay? So it's likely that a bank is getting involved offering an RCF.

30 years ago they would've offered term loan A as well and then helped out with sourcing the rest. But now you can see there's no term loan a, okay? So the kind of lead bank that maybe the lead underwriter or something like that is offering an RCF and then maybe some facilities which we'll talk about later.

But all of the other stuff is gonna end up in somebody else's balance sheet. Okay? And, and that I think just knowing who's who is important here, the bank as we call it, will have probably this lot and then institutional investors will probably end up with this lot. And so you can see that the bulk of the debt is now not coming from bank debt anymore, it's coming from institutional investors. And it's reinforces the point that I made earlier when we looked at that term loan B.

Now you can see the RCF is complicated, it's got a rate, but down here two things which are much more sophisticated about the RCF in this model. The number one thing is the RCF has a ceiling in lots of models that we hand you over summer programs. The RCF is modeled as effectively limitless.

And that's because again we say this's an intermediate model. So if you were running this, you'd need to check it, make sure it's okay. And if the RCF goes above a certain amount, say 500 million or something, or in this case 100 million, then you would need to change the assumptions.

But in this model, the RCF does have a ceiling.

The other thing that this model does nicely is although it's got an interest rate which is being modeled here, the RCF also has a commitment fee making it much more real world. And the RCF commitment fee reflects the fact that the bank would need to set aside funds for the whole RCF just in case the company draws on it. And those set aside funds have a certain cost and that cost is being given to the target in the form of the commitment fee. And so when it comes to the debt schedule, the RCF is gonna be way more complex because we're gonna have interest on the drawn amount and then interest or the commitment fee on the undrawn amount.

All right, so that's the RCF. And you can see there's also a flaw. Now there's no flaw on the RCF and actually flaws are not so important anymore.

in the era of like near zero interest floors were seen as very important because who knows how low the interest rate could go. Now given where we are now with interest just going up and up and up floors are less important, but it's good to be aware of them. All right, next, the refinancing facility, and you've probably never met the refinancing facility before.

This is our kind of last resort.

If in the model we have a terrible year in intermediate models, we would have say the senior debt, it's really bad or the RCF, which is pretty bad. Picking up the slack here, what we've got is we've got the refinancing facility picking up the slack, which is bit better. Now what is the refinancing facility? It's a kind of mega RCF.

It's an a way that you can add to your existing borrowing. So may be attached to say term B or attached to other debt. And if you draw down on it, then you're gonna incur very heavy costs. You can see it's one of the most costly debts in the whole lot. You could think of it as a bridge line.

Okay, next we've got a CapEx facility. And you can see again, it's fairly expensive about in line with the RCF.

It's a bit more expensive. What is it? I've got a slide on it.

Okay? The CapEx facility is like an RCF, but specifically for things like PP&E.

So what you're gonna do is you're gonna go to the uh, the bank and this would probably be a bank and say I would like a CapEx facility of a hundred million and I can only draw down on it if I could come to you with invoices for PP&E of certain kinds. And that cuts down on the amount of admin for the bank because they can lend with reasonable invoices and it's a nice facility to have for the target. Okay? But you can't use that for anything else. And that means that you can't borrow on that to pay off other debt. And that means from a modeling perspective, it's complex because previously in intermediate models, previously in intermediate models, if you needed to pay off term loan B and you were cash strapped, you would borrow on the RCF to get that cash. And if we were to treat the RCF as the same as the CapEx facility, then you would end up borrowing on that and that's not allowed. So we need a special line for that later. It's complex.

Okay? Then we've got the term loan B. And you can see the pricing here is a bit more real world as well. Okay? You can see that all the term loans are priced on a variable rates, which is formally LIBOR, but since LIBORs demise would be some sort of variable rate. We've put SOFR here, it might be something like term SOFR or prime rate, something like that. And you can see that lots of these are a spread or margin, okay? Around the prime rate. And then the bonds are priced differently and that's because they're fixed. So they don't have a margin around say the variable.

Okay? So much more complex here. We also have maturity. And then later on we've got repayment schedules. This is a much more real world look at things. And that brings us to the end of the source and uses. Again, I'm just gonna have a quick look at the Q&A. No, the chat isn't there either. Okay, let's have a quick chat then in our last five, 10 minutes about debt capacity. Because can you see these numbers here? These amounts. So these amounts you might wanna where they're from. And you can see these are hard coded, right? So this eight hundred's hard coded.

So you might think, well, hold on, what happened to the debt capacity? Like in the other model? In the other model at least we said, let's model a multiple.

Okay? So let's model a multiple. what would normally happen with debt capacity is there would be some sort of cash flow analysis. Those cash flows would go to these institutions. They would then be churned via the magic of NPV into principles and then we would make sure that those worked. And that's part of what this model is for. Now, there's no laws around how much debt you should take on, but the Fed did publish some guidelines, which they wanted to be binding, but it didn't work out. And if we just talk about a couple of these, the first thing is that debt to EBITDA of six is seen as appropriate. Now some deals do go over that these guidelines were banks. So non-bank players can go beyond this. And we know that non-bank players are becoming more and more important in LBOs.

Now, let's say you had a, were paying something like ev over victar of 12 for a target and you could say debt over EBITDA could be six. And then I know it's a massive simplification, but it would mean equity over EBITDA would also be six. And so that would not be a mega leave a deal, would it be 50 50? And this is one of the chief reasons why, you know, getting a low entry price is so important. Because if we could get the entry price down a bit and keep that debt level high, then we can get away with less equity.

All right? Now the second thing that we might test is we might say, well, is all the senior debt gone by year seven? Is half of the debt gone by year seven, senior or otherwise? And what's happened is probably the debt capacity NPVing has done this the other way round, but we could test it using our advanced model.

If we went to the debt schedule and we had a look at total debt over the first 1, 2, 3, 4, 5, 6, 7 years, we could then say, well what is the debt compared to the starting debt? Well, let's go and find the starting debt. Or is it here it is? No, that's not it.

So starting debt be or that month, wouldn't it? And you can see that by the end we're looking at 44.1% of the starting debt, which means over 50% of it has been paid down. And so this would be a reasonable approach according to this 50% debt made by year seven, and we could test the other two and we could design the whole deal around that using debt capacity and MPVs.

Okay, good. Right? I think that's about as far as I want to go. I'll just open up to questions now or comments. If you wanna dial off, feel free to, I hope that was useful and that it gave you a little bit more insight if you've got access to Felix, which I imagine you do and you wanted to go a bit further with that model, okay? You could go into where is it? Private equity, okay? And if you want to look at the intermediate model, I think it's in here.

And if you wanted to look at the advanced model, you could probably find it in these two. Okay? So if you wanted to go a bit further and, and really start playing around with the model and watch people do it, then you could look at those and remember that we will have a session on the debt schedule next week, okay? With me. And then on the exit and the returns the week after with Maria, and then the week after, you've got specifically the stop period. So that, I can't remember who that is with or it's been scheduled yet with the person, but it's with somebody. And so if you wanted to defer looking at the model until after that series, fair enough. But if you wanted to get ahead and start looking at it, you know where it is now. All right. Thanks very much for your attention. Uh, I hope that was good and um, I'll stop talking now and then have a look at the q and a and bid you a lovely afternoon, evening, morning, wherever you are and I may see you next week.