Checking the debt ratios in an LBO model is a crucial part, we want to make sure we're not breaching any covenants set by debt holders To see the full effect of interest, let's turn our iterations on and then the switch on So to turn the iterations on, I go to "File" "Options" and then I go down to the formula section And here, you can see I've already turned that on I press "OK", I now go to the info tab and I change the circular switch from 0 to 1 Firstly we need to gather some information together, we start by grabbing the EBITDA So I scroll all the up to my income statement and there it is, 126.5 Now we need to get some various debt items, my revolver that's up in the debt financing section Current figure of zero. Term loan A also up in my debt financing section 387.6 Term loan B just underneath the term loan A in debt financing and that's 165 Mezzanine loan 81.5 And lastly the senior unsecured notes and the senior unsecured are 75, there we go Last up cash, I can get cash from the bottom of my cash flow statement and we can start to add some of these figures together My total debt is everything from revolver down to the senior unsecured notes And my senior debt Most people would normally go for term loan A and B, however we also know that revolvers are typically given by the term loan provider So we're going to include that as well So my total debt divided by EBTIDA at entry, that figure was 6 times So I'm hoping that will have come down a little bit given that we've paid off some of the debt and maybe EBITDA has gone up a little bit And it has, it's come down to 5.6 great! We're getting away from that maximum amount we had Senior debt divided by EBITDA Again lower still 4.4 Now my cash interest expense, now this is important Cash flows are really important in any LBO, we can ignore certain interest items (such as the mezzanine PIK note) And also the amortization of debt fees So my cash interest expense, I can get that from my cash flow statement So everything from revolver down to the senior unsecure, importantly that's missing our that mezzanine PIK note I want to make sure that's a positive, so times it by minus 1 And I now take EBITDA divided by that to work out interest cover Interest cover is currently 5.1 However EBITDA might not all be available to pay out interest Certain items have to be paid for and a good one here is capex Capex has to be reinvested in the business in order to keep the business going So I'll start by taking EBITDA, subtract off the capex I'm actually going to add capex because capex is provided here as a negative And then divide all of that by my cash interest expense 3.6 Total interest expense, just give an idea of what's happening to your income statement If I go to my income statements I'm going to include everything from my amortization of debt issuance fees because that is a debt generated expense All the way down to my interest on senior unsecured notes. I'll times that by minus one so it's a positive And I'll calculate interest cover on that 3.9 The last one is cash flow available for debt repayment to total debt Cash flow available for debt repayments from the cash flow statement Compare that to my total debt Comes to 5.3% So with iterations on and with the switch turned on (so all of the interest is flowing through) we can have a look at some of these figures I notice that my interest coverage is currently 5.1 If that figure was lower, if that was around 3 or even 2, I would be getting quite worried as a debtholder My interest potentially isn't going to be paid if it drops much lower 5.1 though, pretty healthy in an LBO model Similarly we saw that total debt to EBITDA, the maximum was 6 at the deal date, that's come down As we copy these figures to the right, we should see all of them improving So let's copy all of these to the right And what do we notice? We can see our total debt coming down, senior debt coming down, total debt to EBITDA coming down as well This is all fantastic In terms of our interest coverage going up 5.1 to 5.7 to 7 times, this is all good And again EBITDA over total interest, that coverage going up as well