Question for Lenders (loan sizing)
December 16, 2020
by a searcher from University of Southern California - Marshall School of Business in Los Angeles, CA, USA
Assumed Scenario:
- SearchFund to acquire 70% stake of TargetCo via share deal
- TargetCo EBITDA (FCF) $5m, no existing debt
- Deal multiple 6x EBITDA, i.e., SF to pay $21m for 70% majority
Questions:
- How much can a lender provide to the SearchFund under this scenario? (holdco financing, non-recourse)
- Is a PIK toggle structure possible? Otherwise how would a lender structure this?
- Any relevant notes/experience would be helpful as well, thanks
(Deal is at an early stage. Checking out what's possible and who's out there...)
from University of Notre Dame in Dublin, OH, USA
- $5M of EBITDA would put you in the range of some institutional private credit / alternative investment funds.
- Ultimately, the leverage and LTV a lender would provide will depend on the credit quality of the asset. Hard to assess with limited info, but 50% LTV (or 3x in this case) for a straight senior deal would be in the ball park.
- The "cash equity" coming in will be a consideration in this case. Sounds like there would a lot of "rolled equity" in this case, so lenders might discount the value of that, adding some pressure to the LTV / leverage figures I mentioned above.
- Most private credit lenders prefer cash-pay interest. There are lenders out there who will craft creative structures with PIK toggles, but usually this creeps into the "mezz" territory with a correspondingly higher cost of capital.
- As a searchfunder, you'll likely be classified as a "non-traditional sponsor" by most private credit firms (as opposed to a funded private equity firm) which will likely drive higher rates and less-favorable terms, unfortunately.
- Regarding structure, it would be uncommon to lend directly to the SearchFund itself or even the actual HoldCo. Usually, the Borrower entity would be a wholly-owned subsidiary of the HoldCo for structural seniority, but this depends on a variety of factors. Not sure if this is what you were asking about on this point.
Happy to elaborate on anything above if helpful.
from University of Minnesota in St Paul, MN, USA
1) cash flow: fixed charge coverage ratio or debt service coverage (almost the same thing - EBITDA minus dividends/distributions minus CapEx (maintenance of unfinanced actual) over interest and principal; toggle rent in the numerator and denominator depending on the institution)... aim for over 1.20x ratio
2) leverage: for your company size it will be an EBITDA multiple with senior debt over EBITDA less than 3.5x and/or total debt over EBITDA less than 4-4.5x
3) liquidity: cash/revolver availability minus deferred revenue, etc over operating 1 month of operating expenses. Healthy companies are over 3 months of liquidity but varies widely by industry
You will need a first lien on all assets and recourse in this type of structure. Depending on the asset mix, would asset based lending work here? I have experience in that too. In asset based structures liquidity is most important with little regard to leverage ratios with a cash flow ratio over 1.00x
Happy to chat more if needed.