Investment Banking, valuation and M&A
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LBO Analysis
215
STEP IV. COMPLETE THE POST-LBO MODEL
EXHIBIT 5.23 Steps to Complete the Post-LBO Model
Step IV(a): Build Debt Schedule
Step IV(b): Complete Pro Forma Income Statement from EBIT to Net Income
Step IV(c): Complete Pro Forma Balance Sheet
Step IV(d): Complete Pro Forma Cash Flow Statement
Step IV(a): Build Debt Schedule
The debt schedule is an integral component of the LBO model, serving to layer
in the pro forma effects of the LBO financing structure on the target’s financial
statements.
15
Specifically, the debt schedule enables the banker to:
complete the pro forma income statement from EBIT to net income
complete the pro forma long-term liabilities and shareholders’ equity sections of
the balance sheet
complete the pro forma financing activities section of the cash flow statement
As shown in Exhibit 5.27, the debt schedule applies free cash flow to make
mandatory and optional debt repayments, thereby calculating the annual beginning
and ending balances for each debt tranche. The debt repayment amounts are linked
to the financing activities section of the cash flow statement and the ending debt
balances are linked to the balance sheet. The debt schedule is also used to calculate
the annual interest expense for the individual debt instruments, which is linked to
the income statement.
The debt schedule is typically constructed in accordance with the security and
seniority of the loans, securities, and other debt instruments in the capital structure
(i.e., beginning with the revolver, followed by term loan tranches, and bonds). As
detailed in the following pages, we began the construction of ValueCo’s debt sched-
ule by entering the forward LIBOR curve, followed by the calculation of annual
projected cash available for debt repayment (free cash flow). We then entered the
key terms for each individual debt instrument in the financing structure (i.e., size,
term, coupon, and mandatory repayments/amortization schedule, if any).
Forward LIBOR Curve For floating-rate debt instruments, such as revolving credit
facilities and term loans, interest rates are typically based on LIBOR
16
plus a fixed
spread. Therefore, to calculate their projected annual interest expense, the banker
15
In lieu of a debt schedule, some LBO model templates use formulas in the appropriate cells in
the financing activities section of the cash flow statement and the interest expense line item(s)
of the income statement to perform the same functions.
16
3-month LIBOR is generally used.
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216 LEVERAGED BUYOUTS
must first enter future LIBOR estimates for each year of the projection period. LIBOR
for future years is typically sourced from the Forward LIBOR Curve provided by
Bloomberg.
17
EXHIBIT 5.24 Forward LIBOR Curve
($ in millions, fiscal year ending December 31)
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2008
2009 2010
2011 2012
2013 2014 2015
2016 2017 2018
Forward LIBOR Curve
5.10%4.85%4.80%4.35%4.00%3.60%3.30%3.15%3.00%3.00% 5.25%
Debt Schedule
As shown in the forward LIBOR curve line item in Exhibit 5.24, LIBOR is
expected to increase incrementally throughout the projection period from 300 bps
in 2009E to 525 bps by 2018E.
18
The pricing spreads for the revolver and TLB are
added to the forward LIBOR in each year of the projection period to calculate their
annual interest rates. For example, the 2009E interest rate for ValueCo’s revolver,
which is priced at L+325 bps, is 6.25% (300 bps LIBOR + 325 bps spread, see
Exhibit 5.26).
Cash Available for Debt Repayment (Free Cash Flow) The annual projected cash
available for debt repayment is the sum of the cash flows provided by operating and
investing activities on the cash flow statement. It is calculated in a section beneath
the forward LIBOR curve inputs. For each year in the projection period, this amount
is first used to make mandatory debt repayments on the term loan tranches.
19
The
remaining cash flow is used to make optional debt repayments, as calculated in the
cash available for optional debt repayment line item (see Exhibit 5.25).
In addition to internally generated free cash flow, existing cash from the balance
sheet may be used (“swept”) to make incremental debt repayments (see cash from
balance sheet line item in Exhibit 5.25). In ValueCo’s case, however, there is no cash
on the pro forma balance sheet at closing as it is used as part of the transaction
funding. In the event the post-LBO balance sheet has a cash balance, the banker may
choose to keep a constant minimum level of cash on the balance sheet throughout
the projection period by inputting a dollar amount under the “MinCash” heading
(see Exhibit 5.25).
As shown in Exhibit 5.25, pro forma for the LBO, ValueCo generates $65.3
million of cash flow from operating activities in 2009E. Netting out ($21.6) million
of cash flow from investing activities results in cash available for debt repayment of
$43.7 million. After satisfying the $4.5 million mandatory amortization of the TLB,
ValueCo has $39.2 million of cash available for optional debt repayment.
17
Bloomberg function: “FWCV,” select “US” (if pricing is based on U.S. LIBOR).
18
Following the onset of the subprime mortgage crisis and the ensuing credit crunch, and the
resulting rate cuts by the Federal Reserve, investors have insisted on “LIBOR floors” in many
new bank deals. A LIBOR floor guarantees a minimum coupon for investors regardless of
how low LIBOR falls. For example, a term loan priced at L+350 bps with a LIBOR floor of
325 bps will have a cost of capital of 6.75% even if the prevailing LIBOR is lower than 325
bps.
19
Mandatory repayments are determined in accordance with each debt instrument’s amorti-
zation schedule.
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EXHIBIT 5.25
Cash Available for Debt Repayment (Free Cash Flow)
($ in millions, fiscal year ending December 31)
Projection Period
Pro forma Year 1 Year 2 Year 3
Year 4 Year 5 Year 6 Year 7
Year 8 Year 9 Year 10
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Forward LIBOR Curve
5.10%
4.85%
4.80%
4.35%
4.00%
3.60%
3.30%
3.15%
3.00%
3.00%
5.25%
$65.3
Cash Flow from Operating Activities
$74.9
$83.4
$90.2
$96.3
$103.2
$110.7
$117.1
$122.9
$128.8
Cash Flow from Investing Activities
(21.6)
(22.9)
(23.8)
(24.5)
(25.3)
(26.0)
(26.8)
(27.6)
(29.3)
(28.4)
Cash Available for Debt Repayment
$43.7 $52.0
$59.6
$65.7
$71.1
$77.2
$83.9
$89.5
$94.4
$99.6
Total Mandatory Repayments
MinCash
(4.5) (4.5) (4.5) (4.5)
(4.5) (4.5)
(4.5) -
- -
Cash From Balance Sheet
-
-
-
-
-
-
-
3.2
-
92.7
187.2
$39.2
Cash Available for Optional Debt Repayment
$47.5
$55.1
$61.2
$66.6
$72.7
$79.4
$92.7
$187.2
$286.7
Debt Schedule
= Cash Flow from Operating Activiites
2009
+
Cash Flow from Financing Activities
2009
= $65.3 million + ($21.6) million
= Mandatory Repayments on the Term Loan B,
calculcated as 1% x $450.0 million
= Cash Flow for Debt Repayment
2012
-
Term Loan B Mandatory Repayment
2012
= $65.7 million + ($4.5) million
= IF (Cash Balance toggle = 1, then sweep cash from the Balance Sheet
less the Minimum Cash Balance, otherwise display 0)
217
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218 LEVERAGED BUYOUTS
Revolving Credit Facility In the “Revolving Credit Facility” section of the debt
schedule, the banker inputs the spread, term, and commitment fee associated with
the facility (see Exhibit 5.26). The facility’s size is linked from an assumptions
page where the financing structure is entered (see Exhibits 5.14 and 5.54) and the
beginning balance line item for the first year of the projection period is linked from
the balance sheet. If no revolver draw is contemplated as part of the LBO financing
structure, then the beginning balance is zero.
The revolver’s drawdown/(repayment) line item feeds from the cash available
for optional debt repayment line item at the top of the debt schedule. In the event the
cash available for optional debt repayment amount is negative in any year (e.g., in a
downside case), a revolver draw (or use of cash on the balance sheet, if applicable)
is required. In the following period, the outstanding revolver debt is then repaid first
from any positive cash available for optional debt repayment (i.e., once mandatory
repayments are satisfied).
In connection with the ValueCo LBO, we contemplated a $100 million revolver,
which is priced at L+325 bps with a term of six years. The revolver is assumed to be
undrawn at the close of the transaction and remains undrawn throughout the pro-
jection period. Therefore, no interest expense is incurred. ValueCo, however, must
pay an annual commitment fee of 50 bps on the undrawn portion of the revolver,
translating into an expense of $500,000 ($100 million × 0.50%) per year (see
Exhibit 5.26).
20
This amount is included in interest expense on the income statement.
Term Loan Facility In the “Term Loan Facility” section of the debt schedule, the
banker inputs the spread, term, and mandatory repayment schedule associated with
the facility (see Exhibit 5.27). The facility’s size is linked from the sources and uses
of funds on the transaction summary page (see Exhibit 5.46). For the ValueCo LBO,
we contemplated a $450 million TLB with a coupon of L+350 bps and a term of
seven years.
Mandatory Repayments (Amortization) Unlike a revolving credit facility, which
only requires repayment at the maturity date of all the outstanding advances, a term
loan facility is fully funded at close and has a set amortization schedule as defined
in the corresponding credit agreement. While amortization schedules vary per term
loan tranche, the standard for TLBs is 1% amortization per year on the principal
amount of the loan with a bullet payment of the loan balance at maturity.
21
As noted in Exhibit 5.27 under the repayment schedule line item, ValueCo’s new
TLB requires an annual 1% amortization payment equating to $4.5 million ($450
million x 1%).
Optional Repayments A typical LBO model employs a “100% cash flow sweep”
that assumes all cash generated by the target after making mandatory debt repay-
ments is applied to the optional repayment of outstanding prepayable debt (typically
20
To the extent the revolver is used, the commitment expense will decline and ValueCo will
be charged interest on the amount of the revolver draw at L+325 bps.
21
Credit agreements typically also have a provision requiring the borrower to prepay term
loans in an amount equal to a specified percentage (and definition) of excess cash flow and in
the event of specified asset sales and issuances of certain debt or equity.
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EXHIBIT 5.26
Revolving Credit Facility Section of Debt Schedule
Projection Period
Pro forma Year 1 Year 2 Year 3
Year 4 Year 5 Year 6 Year 7
Year 8 Year 9 Year 10
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Forward LIBOR Curve
5.10%
4.85%
4.80%
4.35%
4.00%
3.60%
3.30%
3.15%
3.00%
3.00%
5.25%
$65.3
Cash Flow from Operating Activities
$74.9
$83.4
$90.2
$96.3
$103.2
$110.7
$117.1
$122.9
$128.8
Cash Flow from Investing Activities
(21.6)
(22.9)
(23.8)
(24.5)
(25.3)
(26.0)
(26.8)
(27.6)
(29.3)
(28.4)
Cash Available for Debt Repayment
$43.7 $52.0
$59.6
$65.7
$71.1
$77.2
$83.9
$89.5
$94.4
$99.6
Total Mandatory Repayments
MinCash
(4.5) (4.5) (4.5) (4.5)
(4.5)
(4.5)
(4.5)
-
-
-
Cash from Balance Sheet
-
-
-
-
-
-
-
3.2
-
92.7
187.2
$39.2
Cash Available for Optional Debt Repayment
$47.5
$55.1
$61.2
$66.6
$72.7
$79.4
$92.7
$187.2
$286.7
Revolving Credit Facility
$100.0
Revolving Credit Facility Size
Spread
3.250%
Term
6 years
Commitment Fee on Unused Portion
0.50%
Beginning Balance
- - -
- - - -
-
-
-
Drawdown / (Repayment)
-
-
-
-
-
-
-
-
-
-
Ending Balance
-
- -
-
-
-
-
-
-
-
Interest Rate
6.25% 6.40%
6.55%
6.85%
7.25%
7.60%
8.05%
8.10%
8.35%
8.50%
Interest Expense
- - - -
- - - -
-
-
0.5
Commitment Fee
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
= Ending Revolver Balance from Pro Forma 2008 Balance Sheet
= LIBOR
2009
+ Spread on Revolver
= 3.00% + 3.25%
= IF (Cash Available for Optional Debt Repayment
2018
> 0, then sweep the negative value of the minimum of (Cash Available for Optional Debt Repayment
2018
vs.
the Beginning Balance
2017
), otherwise sweep the negative value of the minimum of (Cash Available for Optional Debt Repayment
2018
vs. 0))
= IF (Cash Available for Optional Debt Repayment
2018
> 0, -MIN(Cash Available for Optional Debt Repayment
2018
, $0.0), -MIN(Cash Available for Optional Debt Repayment
2018
, 0))
= Ending Balance from prior year
= Commitment Fee on Unused Portion x (Revolver Capacity - (Average of Beginning Balance
2016
and Ending Balance
2017
))
= 0.50% x $100.0 million
($ in millions, fiscal year ending December 31)
Debt Schedule
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EXHIBIT 5.27
Term Loan Facility Section of Debt Schedule
($ in millions, fiscal year ending December 31)
Projection Period
Pro forma Year 1 Year 2 Year 3
Year 4 Year 5 Year 6 Year 7
Year 8 Year 9 Year 10
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Forward LIBOR Curve
5.10%
4.85%
4.80%
4.35%
4.00%
3.60%
3.30%
3.15%
3.00%
3.00%
5.25%
3.56$
Cash Flow from Operating Activities
$74.9 $83.4 $90.2 $96.3
$103.2 $110.7 $117.1 $122.9
$128.8
Cash Flow from Investing Activities
(21.6)
(22.9)
(23.8)
(24.5)
(25.3)
(26.0)
(26.8)
(27.6)
(28.4)
(29.3)
Cash Available for Debt Repayment
$43.7 $52.0 $59.6 $65.7
$71.1 $77.2 $83.9 $89.5
$94.4 $99.6
Total Mandatory Repayments
MinCash
(4.5) (4.5) (4.5) (4.5)
(4.5) (4.5) (4.5) -
-
-
Cash from Balance Sheet
-
-
-
-
-
-
-
-
3.2
92.7
187.2
$39.2
Cash Available for Optional Debt Repayment
$47.5 $55.1 $61.2
$66.6 $72.7 $79.4 $92.7
$187.2 $286.7
Term Loan B Facility
$450.0
Size
Spread
3.500%
Term
7 years
Repayment Schedule
1.0%
per Annum, Bullet at Maturity
$450.0
Beginning Balance
$406.3 $354.2 $294.6 $228.9
$157.9 $80.7
-
--
Mandatory Repayments
(4.5)
(4.5)
(4.5)
(4.5) (4.5)
(4.5)
(4.5) -
--
Optional Repayments
(47.5)
(39.2)
(55.1)
(61.2)
(66.6)
(76.2)
(72.7)
-
-
-
$406.3
Ending Balance
$354.2 $294.6 $228.9
$157.9 $80.7
-
-
-
-
Interest Rate
6.50% 6.65% 6.80% 7.10%
7.50% 7.85% 8.30% 8.35%
8.60% 8.75%
27.8
Expense
Interest
25.3 22.1 18.6
14.5 9.4 3.3 -
-
-
Debt Schedule
= Ending Term Loan B Balance from Pro Forma 2008 Balance Sheet
= The negative of the minimum of (Cash Flow Available for Optional Debt Repayment
2011
vs. Beginning Balance
2011
+ Mandatory Amortization
2011
)
= -MIN($55.1 : $354.2 million + ($4.5) million)
= IF (Beginning Balance
2014
is greater than 0 and greater than 1% of the principal amount,
then subtract 1% Mandatory Amortization on the principal amount of the Term Loan B, otherwise display $0.0)
= IF ($157.9 million > 0 and > 1% x $450.0, then 1% x $450.0 million, otherwise $0.0)
= Interest Rate
2008
x Average(Beginning Balance
2009
: Ending Balance
2009
)
= 6.50% x Average of $450.0 million and $406.3 million
220
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LBO Analysis
221
bank debt). For modeling purposes, bank debt is generally repaid in the following
order: revolver balance, term loan A, term loan B, etc.
22
From a credit risk management perspective, ideally the target generates sufficient
cumulative free cash flow during the projection period to repay the term loan(s)
within their defined maturities. In some cases, however, the borrower may not be
expected to repay the entire term loan balance within the proposed tenor and will
instead face refinancing risk as the debt matures.
As shown in Exhibit 5.27, in 2009E, ValueCo is projected to generate cash avail-
able for debt repayment of $43.7 million. Following the mandatory TLB principal
repayment of $4.5 million, ValueCo has $39.2 million of excess free cash flow re-
maining. These funds are used to make optional debt repayments on the TLB, which
is prepayable without penalty. Hence, the beginning year balance of $450 million is
reduced to an ending balance of $406.3 million following the combined mandatory
and optional debt repayments.
Interest Expense The banker typically employs an average interest expense ap-
proach in determining annual interest expense in an LBO model. This methodology
accounts for the fact that bank debt is repaid throughout the year rather than at the
beginning or end of the year. Annual average interest expense for each debt tranche
is calculated by multiplying the average of the beginning and ending debt balances
in a given year by its corresponding interest rate.
As shown in Exhibit 5.27, in 2009E, ValueCo’s TLB has a beginning balance of
$450 million and ending balance of $406.3 million. Using the average debt approach,
this implies interest expense of $27.8 million for the TLB in 2009E (($450 million +
$406.3 million)/2) x 6.5%). The $27.8 million of interest expense is linked from the
debt schedule to the income statement under the corresponding line item for TLB
interest expense.
Senior Subordinated Notes In the “Senior Subordinated Notes” section of the debt
schedule, the banker inputs the coupon and term associated with the security (see
Exhibit 5.28). As with the TLB, the principal amount of the notes is linked from the
EXHIBIT 5.28
Senior Subordinated Notes Section of Debt Schedule
($ in millions, fiscal year ending December 31)
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2008
2009 2010
2011
2012 2013
2014
2015 2016 2017 2018
Senior Subordinated Notes
$300.0Size
Coupon
10.000%
Term 10 years
$300.0Beginning Balance $300.0 $300.0 $300.0 $300.0 $300.0 $300.0 $300.0 $300.0 $300.0
Repayment
- - -
-
- - -
-
- -
$300.0Ending Balance $300.0 $300.0 $300.0 $300.0 $300.0 $300.0 $300.0 $300.0 $300.0
30.0ExpenseInterest 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0
Debt Schedule
= Coupon on Senior Subordinated Notes x Principal Amount
= 10.0% x $300.0
22
Some credit agreements give credit to the borrower for voluntary repayments on a go-
forward basis and/or may require pro rata repayment of certain tranches.
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222 LEVERAGED BUYOUTS
sources and uses of funds on the transaction summary page (see Exhibit 5.46). Unlike
traditional bank debt, high yield bonds are not prepayable without penalty and do
not have a mandatory repayment schedule prior to the bullet payment at maturity.
As a result, the model does not assume repayment of the high yield bonds prior
to maturity and the beginning and ending balances for each year in the projection
period are equal.
For the ValueCo LBO, we contemplated a senior subordinated notes issuance
of $300 million with a 10% coupon and a maturity of ten years. The notes are the
longest-tenored debt instrument in the financing structure. As the notes do not amor-
tize and there is no optional repayment due to the call protection period (standard
in high yield bonds), annual interest expense is simply $30 million ($300 million x
10%).
The completed debt schedule is shown in Exhibit 5.29.
Step IV(b): Complete Pro Forma Income Statement from EBIT to
Net Income
The calculated average annual interest expense for each loan, bond, or other debt
instrument in the capital structure is linked from the completed debt schedule to its
corresponding line item on the income statement (see Exhibit 5.30).
23
Cash Interest Expense Cash interest expense refers to a company’s actual cash
interest and associated financing-related payments in a given year. It is the sum of
the average interest expense for each cash-pay debt instrument plus the commitment
fee on the unused portion of the revolver and the administrative agent fee.
As shown in Exhibit 5.30, ValueCo is projected to have $58.5 million of cash
interest expense in 2009E. This amount decreases to $30.7 million by the end of the
projection period after the bank debt is repaid.
Total Interest Expense Total interest expense is the sum of cash and non-cash
interest expense, most notably the amortization of deferred financing fees, which is
linked from an assumptions page (see Exhibit 5.54). The amortization of deferred
financing fees, while technically not interest expense, is included in total interest
expense as it is a financial charge. In a capital structure with a PIK instrument, the
non-cash interest portion would also be included in total interest expense and added
back to cash flow from operating activities on the cash flow statement.
As shown in Exhibit 5.30, ValueCo has non-cash deferred financing fees of $2.5
million in 2009E. These fees are added to the 2009E cash interest expense of $58.5
million to sum to $60.9 million of total interest expense.
23
At this point, a circular reference centering on interest expense has been created in the
model. Interest expense is used to calculate net income and determine cash available for debt
repayment and ending debt balances, which, in turn, are used to calculate interest expense. The
spreadsheet must be set up to perform the circular calculation (in Microsoft Excel) by selecting
T
ools, Options, clicking on the “Calculation” tab, checking the box next to “Iteration,” and
setting the “Maximum iterations” field to 1000 (see Exhibit 3.30).
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EXHIBIT 5.29
Debt Schedule
($ in millions, fiscal year ending December 31)
Projection Period
Pro forma Year 1 Year 2
Year 3 Year 4 Year 5
Year 6
Year 7 Year 8 Year 9
Year 10
2008 2009 2010
2011 2012 2013
2014 2015 2016
2017 2018
Forward LIBOR Curve
5.10%
4.85%
4.80%
4.35%
4.00%
3.60%
3.30%
3.15%
3.00%
3.00%
5.25%
Cash Flow from Operating Activities
$65.3 $74.9 $83.4
$90.2 $96.3 $103.2 $110.7
$117.1
$128.8
$122.9
Cash Flow from Investing Activities
(21.6) (22.9) (23.8)
(24.5) (25.3) (26.0)
(26.8) (27.6)
(29.3)
(28.4)
Cash Available for Debt Repayment
$43.7 $52.0 $59.6
$71.1
$65.7
$77.2 $83.9 $89.5
$99.6
$94.4
Total Mandatory Repayments
MinCash
(4.5)
--
-
Cash from Balance Sheet
-
-
-
-
-
-
-
-
3.2
187.2
92.7
Cash Available for Optional Debt Repayment
$39.2 $47.5 $55.1
$66.6
$61.2
$72.7 $79.4
$187.2
$92.7
$286.7
Revolving Credit Facility
$100.0
Revolving Credit Facility Size
Spread
3.250%
Term
6 years
Commitment Fee on Unused Portion
0.50%
-
Beginning Balance
- - -
- - -
-
-
-
Drawdown / (Repayment)
- -
- -
-
- - -
-
-
-
Ending Balance
- -
-
-
-
-
-
-
-
Interest Rate
6.25% 6.40% 6.55%
6.85%
7.25%
7.60% 8.05%
8.10%
8.35%
8.50%
-
Interest Expense
- - -
- - -
-
-
-
0.5
Commitment Fee
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
Term Loan B Facility
$450.0
Size
Spread
3.500%
Term
7 years
Repayment Schedule
1.0%
per Annum, Bullet at Maturity
$450.0
Beginning Balance
$406.3 $354.2 $294.6
$228.9 $157.9 $80.7
-
-
-
Mandatory Repayments
(4.5) (4.5) (4.5) (4.5)
(4.5)
(4.5)
(4.5)
-
-
-
Optional Repayments
(39.2) (47.5) (55.1)
(61.2) (66.6)
(76.2)
(72.7)
-
-
-
$406.3
Ending Balance
$354.2 $294.6 $228.9
$157.9 $80.7
-
--
-
Interest Rate
6.50% 6.65% 6.80%
7.10% 7.50% 7.85%
8.30%
8.35%
8.60% 8.75%
27.8
Interest Expense
25.3
22.1 18.6 14.5
9.4
3.3 -
-
-
Senior Subordinated Notes
$300.0
Size
Coupon
10.000%
Term
10 years
$300.0
Beginning Balance
$300.0 $300.0 $300.0
$300.0 $300.0 $300.0
$300.0 $300.0 $300.0
Repayment
-
- - - - - - -
-
-
$300.0
Ending Balance
$300.0 $300.0 $300.0
$300.0 $300.0 $300.0
$300.0 $300.0 $300.0
30.0
Interest Expense
30.0
30.0 30.0 30.0
30.0 30.0 30.0
30.0
30.0
Debt Schedule
(4.5)
(4.5)
(4.5)
(4.5)
(4.5)
(4.5)
223
P1: ABC/ABC P2:c/d QC:e/f T1:g
c05 JWBT063-Rosenbaum March 18, 2009 15:37 Printer Name: Hamilton
224 LEVERAGED BUYOUTS
EXHIBIT 5.30 Pro Forma Projected Income Statement – EBIT to Net Income
($ in millions, fiscal year ending December 31)
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2008
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$130.0EBIT $140.4 $148.8 $154.8 $159.4 $164.2 $169.1 $174.2 $179.4 $184.8 $190.4
13.0% % margin 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0%
Interest Expense -----------
Revolving Credit Facility - ----------
29.3Term Loan B 27.8 25.3 22.1 18.6 14.5 9.4 3.3 - - -
30.0Senior Subordinated Notes 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0
0.5Commitment Fee on Unused Revolver 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
0.2Administrative Agent Fee
0.2 0.2
0.2 0.2
0.2 0.2 0.2 0.2 0.2
0.2
$59.9 Cash Interest Expense $58.5 $55.9 $52.7 $49.2 $45.2 $40.0 $34.0 $30.7 $30.7 $30.7
2.5Amortization of Deferred Financing Fees
2.5 2.5 2.5 2.5 2.5 2.5 2.2 1.0 1.0 1.0
$62.4 Total Interest Expense $60.9 $58.4 $55.2 $51.7 $47.6 $42.5 $36.2 $31.7 $31.7 $31.7
Interest Income
- - - -
--
(0.0) (1.4) (7.1) (4.2)
$60.9 Net Interest Expense $58.4 $55.2 $51.7 $47.6 $42.5 $36.1 $30.2 $27.5 $24.6
------ - - - -
79.5Earnings Before Taxes 90.4 99.6 107.7 116.6 126.7 138.1 149.2 157.3 165.8
30.2Income Tax Expense
34.4 37.9 40.9 44.3
48.1
52.5 56.7 59.8 63.0
$49.3 Net Income $56.1 $61.8 $66.8 $72.3 $78.5 $85.6 $92.5 $97.5 $102.8
4.6% % margin 4.9% 5.2% 5.4% 5.7% 6.0% 6.4% 6.7% 6.9% 7.0%
Income Statement
Net Interest Expense Net interest expense is calculated by subtracting interest
income received on cash held on a company’s balance sheet from its total interest
expense. In the ValueCo LBO, however, until 2015E (Year 7), when all prepayable
debt is repaid and cash begins to build on the balance sheet, there is no interest
income as the cash balance is zero. In 2016E, ValueCo is expected to earn interest
income of $1.4 million,
24
which is netted against total interest expense of $31.7
million to produce net interest expense of $30.2 million.
Net Income To calculate ValueCo’s net income for 2009E, we subtracted net inter-
est expense of $60.9 million from EBIT of $140.4 million, which resulted in earnings
before taxes of $79.5 million. We then multiplied EBT by ValueCo’s marginal tax
rate of 38% to produce tax expense of $30.2 million, which was netted out of EBT
to calculate net income of $49.3 million.
Net income for each year in the projection period is linked from the income
statement to the cash flow statement as the first line item under operating activities.
It also feeds into the balance sheet as an addition to shareholders’ equity in the form
of retained earnings.
The completed pro forma income statement is shown in Exhibit 5.31.
Step IV(c): Complete Pro Forma Balance Sheet
Liabilities The balance sheet is completed by linking the year-end balances for
each debt instrument directly from the debt schedule. The remaining non-current
and non-debt liabilities, captured in the other long-term liabilities line item, are
generally held constant at the prior year level in the absence of specific management
guidance.
24
Assumes a 3% interest rate earned on cash (using an average balance method), which is
indicative of a short-term money market instrument.