Basic, lesson 1 of 3
The debt schedule, tranche by tranche
A buyout is financed with several kinds of debt, and each one has its own rules for drawing, repaying, and prepaying. The debt schedule is where those rules live.
10 min, 3 checks
1The tranches and their rules
The debt schedule tracks every tranche from the close to the exit: beginning balance, draws, mandatory repayment, optional repayment, ending balance, and interest. Before you build it you need to know what each tranche allows.
| Tranche | Who lends | Amortization | Prepayable? | Rate |
|---|---|---|---|---|
| Revolver | Banks | None; drawn and repaid as needed | Yes, any time | Floating, plus a fee on the undrawn amount |
| Term loan A | Banks | Heavy, often 5% to 10% a year or more | Yes, at par | Floating |
| Term loan B | Institutional loan investors | Light, usually 1% a year, rest at maturity | Yes, often at par after a short soft call | Floating, wider spread than TLA |
| Senior or subordinated notes | Bond investors | None; bullet at maturity | Only with a call premium after a non call period | Usually fixed, higher |
The pattern to remember: the higher a tranche sits in the stack and the more it amortizes, the cheaper it is and the more control the lenders keep. Notes are expensive partly because the sponsor cannot pay them off early for free.
Check 1
A $400m term loan B amortizes 1% of the original principal each year. What is the mandatory repayment in year one, in $m?
2Mandatory versus optional repayment
Mandatory repayment is the scheduled amortization in the credit agreement. It is owed whether or not the company had a good year. Optional repayment is anything above that, paid from excess cash. In a model, mandatory payments come first and the optional sweep uses whatever cash is left.
The usual order of the optional sweep in a model is revolver first (the cheapest to redraw later, so clear it), then term loans, and never the notes. Some credit agreements require term loan prepayments to be shared pro rata between TLA and TLB; a simple model pays them in order of seniority. Say which convention you used.
Check 2
A model sweeps excess cash to repay debt. Which tranche is normally left out of the sweep?
3The revolver as the plug
The revolver is the only line that can go up. When free cash flow after mandatory payments is negative, and the cash above the minimum balance is not enough to cover it, the company draws on the revolver. When cash comes back, the revolver is the first thing repaid.
Revolver draw = MAX(0, -(FCF - Mandatory repayment + Beginning cash - Minimum cash))
Capped at the commitment. If the draw would exceed it, the company is out of liquidity and the model should flag it.
Worked example
A bad year at Harlow Packaging
- 1Free cash flow before debt repayment is -$12m after a working capital build.
- 2Mandatory amortization is $4m.
- 3Beginning cash is $20m and the minimum the company keeps is $10m, so $10m is free.
- 4Cash available: -$12m - $4m + $10m = -$6m.
The company draws $6m on the revolver and ends the year with exactly $10m of cash. Debt went up in a year the sponsor hoped to pay it down.
An undrawn revolver still costs money: lenders charge a commitment fee on the unused amount, often a fraction of a percent. On a $75m undrawn revolver at 0.375%, that is about $0.28m a year. Small, but it belongs in interest expense.
Check 3
FCF before debt repayment is -$8m, mandatory amortization $5m, beginning cash $25m, minimum cash $15m. How much is drawn on the revolver, in $m?
Terms in this lesson: Leveraged buyout, Amortization, Revolving credit facility, Sponsor.
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