Debt Schedules: Optional Repayments

Transcription

1 Debt Schedules: Optional Repayments In this lesson you're going to learn how to set up the optional debt repayment component of a more advanced debt schedule in this LBO model. Now previously in the basic LBO model, we said that on our debt schedule we have mandatory repayment and then optional repayment for each tranche of debt. Mandatory repayment is simply what we have to pay back each year. So if we owe 10% of the principal or 20% of the principal each year, that is what would show up under mandatory repayment. Then the way optional repayment worked, is that we looked at our cash flow minus however much mandatory repayment we've already made, and then compared that to the beginning bank debt balance, minus the mandatory repayment. We repaid the minimum of those two numbers. So basically we're either paying off the entire remaining balance, if we can do so. Or, if we can't, and the beginning balance is much larger than our cash flow available, we simply use our cash flow available to repay debt, and allocate that toward optionally repaying some of the principal of the bank debt here. [00:01:00] So the concept is going to be very similar in this more advanced LBO model. The only difference this time, is that we have four or five tranches of debt instead of just two before, so in addition to taking into account the mandatory repayment here, which we definitely still need to do, we actually need to do something else, which is, for example, when we get to Term Loan B, we also need to look at how much we've optionally repaid on the revolver and Term Loan A. If we think about this formula and compare it to what we did in the more basic LBO model, the way it works is pretty simple, because we're following the same concept. So let's just think through the formula and figure out what we should do. The final formula that we're going to end up with here looks a bit complex but actually it's fairly simple if you think about each component and build it up step by step, as we're going to do here. [00:02:00] We know that for any type of optional repayment here, we always want to be looking at the previous balance, so the balance at the beginning of the year here. So I'll go up to the revolver to get that. We're going to be looking at the beginning FY2009 balance for the revolver. Then

2 what we want to do is look at how much cash flow we actually have available to repay debt. So in this case the subtotal before the revolver. So we have that and then we want to subtract the mandatory repayment total here. Now the reason for the revolver, the reason why I'm not subtracting any mandatory repayments from the first part of this equation, where I have cell K150 right here, is because with the revolver, we don't really have that. We don't have any mandatory repayments on a revolver, so that's why I'm only looking at the previous balance, and then comparing it to the cash flow available, the subtotal before revolver row right here, minus our mandatory repayments. [00:03:00] Now if we had a very simple model, this formula would actually work correctly most of the time for an item like a revolver. The problem though is that we want to make this more flexible to support different scenarios, and to support the fact that with Term Loan A and Term Loan B, for example, we're going to have to take into account what we've already repaid on the revolver and also the revolver and Term Loan A, when we get down to Term Loan B. Because we're assuming that the revolver has the highest repayment priority, followed by Term Loan A, followed by Term Loan B, and then the high yield debt after that. In this case the high yield debt doesn't even really matter because we can never make optional repayments anyway. So we're really just going to be dealing with bank debt for the optional debt repayments. To make this more flexible, first off, for cell L244 here we want to press F4 to anchor the row here, the 244 part of the formula in the cell, so that this does not shift around at all. We want the column to be able to move, but the row should always stay there. And then for cell L254, so if you think about it, to make this more flexible, what we should really be doing is taking the mandatory repayment and then adding up all of the optional repayments so far. [00:04:00] In this case what I'm going to do is change this to a =SUM formula and say that the sum of these mandatory repayments, plus any optional repayments so far. For the revolver this comes out to just above the revolver line, so in this case we're not really adding anything here, and it could really just be the mandatory repayment total, but I'm using this formula because when we

3 copy this down, we want to be able to use the same exact formula. I'm also going to anchor the 254 part of cell L254 here, so that this does not shift around. So we have that in place. So this formula is now almost correct, but we do have one final remaining problem here, which is that if you think about this, we could actual end up with a negative number in this case. So let's look at this formula. Obviously cell K150 part cannot be negative if we've set up our model properly, because we're dealing with debt on the balance sheet and that should never be negative. [00:05:00] But in the second part here we could potentially end up with a negative because L244, so that's the subtotal before the revolver, and then the sum of the mandatory repayments plus, in this case, nothing, but all the previous optional debt repayments. The problem is what if our mandatory repayments here exceed our subtotal before the revolver? In that case, where we have revolver borrowing required, we do not want to be making any optional debt repayments. We want to be paying off zero in that case because we have no free cash flow available. We have to borrow on the revolver to even make these required debt payments. So we have to check for that fact by checking and adding something in here to see whether or not this number is negative. So I'm going to use the =MAX function, and we're going to take the =MAX of this =MIN function and zero. What this is doing is essentially saying that if we end up with a zero or positive number here, this is fine, but if, on the other hand, we end up with a case where the =MIN function right here is less than zero, [00:06:00] then we want to just default this to zero value rather than a negative value. Because if it's less than zero, then that means that we have a negative here. We never want to be repaying a negative amount on any of our tranches of debt here, so we have to have this check with the =MAX function to insure that we always end up with a positive number or zero for our optional debt repayments. Again, the reason why we need to do that is because in the case where we actually have to borrow or draw on the revolver, we want to make sure that we're not repaying any of our debt

4 optionally. Because if we don't have any cash flow to even make the mandatory repayments, we certainly don't have enough for the optional repayments here. With that in place, I'm going to copy this formula across, and so all that's in place. Now for the next tranches of debt here, so for Term Loan A and Term Loan B, similar logic applies. I'm actually going to go in and just copy this formula and paste it right here. [00:07:00] The differences are that instead of K150 here, remember we want to be drawing from the previous Term Loan A number, so I'm going to go up to the balance sheet and take our 2009 pro forma Term Loan A number right here. And also we want this =SUM formula to extend all the way down through L257, because we want to include optional repayments on the revolver here. The other thing we want to do for Term Loan A, Term Loan B, and the other tranches of debt here, is that we also have to add in any mandatory debt repayments that we've made. Because remember, the initial debt balance here is going to be different since we've already made these mandatory debt repayments. So what we want to do is actually subtract however much we already repaid out of obligation on Term Loan A right here. So we have that in place. I'm going to copy this formula down one row, and I'm just going to press F2 to make sure everything copied correctly. It looks like our =SUM formula has changed appropriately. We are still being linked to the subtotal before revolver. [00:08:00] Then it looks like the L251 cell is being linked to here. That's the mandatory repayment on Term Loan B, and then K160, going up to the balance sheet, is Term Loan A. So it looks like everything there has been linked correctly. Whenever you have a complex formula like this it's always good to press F2 before you begin copying across, because you don't know what you might have forgotten or overlooked or not copied correctly, or changed correctly in this case. So with that in place, we're going to copy these two formulas all the way across. And we see here that we're repaying a huge amount of Term Loan A and Term Loan B debt each year. This is not correct. The problem is that, once again, on the balance sheet and cash flow statement, we

5 have not yet taken into account these changes on the debt schedule. So once we go and link together the statements, this will start to look correct. But for now, we know that at least the mechanics for this are right because we've gone through and checked all these formulas and I've explained the rationale behind why we're doing what we're doing here. [00:09:00] So the numbers here are off right now, but at least the mechanics of the formulas are correct. Now the last part of this is to fill in the optional debt repayment for the Subordinated Note and the Paid in Kind loan here. What we're going to do for this one is just enter zeros in year one for both of these, because remember high yield debt never has an optional repayment option. So we are just going to assume these are zero all the way across. I'm also going to sum up the numbers here at the bottom, and then I'm going to take these year two numbers and copy them across. So we have our optional debt repayment total in each of the subsequent years, and then we also have our mandatory debt repayment total here above. One final think I want to do on our debt schedule is to fill in the cash generated on the balance sheet and then our total uses of funds. The reason we like to do this is just to add another check. We do have similar line items above on the cash flow statement. [00:10:00] But we like to add them in here as well, just to make sure that our debt schedules match up to our cash flow statement. If you think about the cash generated formula, so for this one we're going to look at the cash flow that was available to repay debt, so the subtotal before revolver. Then we're going to subtract our mandatory debt repayments and then our optional debt repayments. In this case it comes out to zero, because were simply using all of our cash flow to repay Term Loan A and Term Loan B on a mandatory basis in our first year. The only problem with this formula is that, once again, we could potentially end up with a negative here, in case we actually have to draw on the revolver, so what we're going to do is, again, wrap this in a =MAX function. This way we know that if we have to draw on the revolver and there's some revolver borrowing required, then we are simply going to generate zero in

6 terms of cash on our balance sheet. Now for total uses of funds, what we want to do here, remember the idea is that we take our sources of funds. [00:11:00] Then our uses of funds, here at the bottom, must be equal to it. So what are we actually using our cash flow, or our additional borrowing for, the additional revolver borrowing? Well, we're using it to make mandatory repayments, to make optional repayments, and to generate cash. So what we're going to do is sum up those items. So cash generated, plus optional repayment total, plus mandatory repayment total, and we get to the same number that's in our sources of funds up above. We're now going to take these two formulas and copy them across, and we see that in each year, until the very end, we are basically generating almost no cash on the balance sheet for the first three years, then finally in years four and five, it starts to turn around. But we see that in each case our sources of funds matches our uses of funds here at the bottom. So we know that this schedule is at least working semi-correctly. The mechanics in this schedule are correct, as I mentioned before. [00:12:00] But once again, the problem is that we have to link it together with the balance sheet and cash flow statement, to make sure that everything is actually being paid down correctly and everything is being reflected properly throughout all three statements. Coming up in the next lesson that's exactly what we're going to get into. We're going to begin by linking them together by first modifying the income statement and cash flow statement. Then, in the next lesson after that, we'll get into modifying the balance sheet to link everything together to make sure that everything is flowing properly throughout this more advanced LBO model.