Sources & Uses

Question 1

Source: Debt

Answer 1

Interest-bearing

No claim on earnings

Reduces size of equity check

Lower cost of capital than equity

Question 2

Source: Bank debt

Answer 2

Low IR
Revolver, TL A/B
Floating
Yes prepayment
5-7 years
Offered by banks

Question 3

Source: Notes

Answer 3

Higher IR
Senior, Subordinated
Fixed
No prepayment
7-10 years
Offered by credit funds and banks

Question 4

Source: Bonds

Answer 4

Highest IR
IG, HY, Convertible
Either fixed or floating
No prepayment
7-10 years
Traded on public markets (less common on small-cap PE)

Question 5

Source: Equity

Answer 5

Common equity: Most typical, bottom of cap strucutre, uncapped upside

Preferred equity: Higher claim than common equity, often with dividends (cash or PIK), more downside protection (liquidation preference)

Options: Right to receive shares down the road, can be exercised later, debt + options may be done to prevent current dilution

Question 6

Use: Purchase equity

Answer 6

Take out shares of existing owners

Question 7

Use: Refinance debt

Answer 7

Replace or take out existing debt

Question 8

Use: Cash to BS

Answer 8

Any excess cash will be sent to BS (typically want to minimize)

Question 9

Use: Original issue discount

Answer 9

Debt is often issued below par to make it more attractive to investors; 1-2% of debt

Like a debt fee

Amortization of OID is interest

Question 10

Use: Fees

Answer 10

Fees related to debt or equity financing

Financing fees are capitalized, can be amortized (over life of debt, 5-7 years)

Question 11

Use: Expenses

Answer 11

Fees spent on advisors, M&A lawyer, accountant, etc.

1x expenses can not be amortized