§ 01
| Layer | Cost | Covenants | Priority |
|---|---|---|---|
| Revolving Credit | SOFR + 200–300 bps | Tightest (maintenance) | First priority (but undrawn) |
| Term Loan A | SOFR + 200–350 bps | Maintenance covenants | Senior secured |
| Term Loan B | SOFR + 300–500 bps | Incurrence only | Senior secured |
| Senior Notes | 6–8% fixed | Incurrence only | Senior unsecured |
| Mezzanine/Sub Notes | 10–14% | Minimal | Subordinated |
| Equity | 20–25% targeted IRR | None — residual claim | Last |
§ 02
Maintenance covenants (tested quarterly) vs. incurrence covenants (tested only when taking new action) — this distinction is critical. Covenant-lite (cov-lite) deals with only incurrence covenants give borrowers more flexibility but less lender protection.
§ 03
When reading about an LBO or leveraged loan, check whether the debt has maintenance or incurrence covenants. Cov-lite structures are more borrower-friendly but mean lenders have less early warning if things deteriorate.
§ 04
An LBO uses 4x senior secured, 2x subordinated, and 1x equity (7x total). If EBITDA drops 30%, which layer is at risk?
§ 05
§ 06
PE-backed company's capital stack: $500M senior secured debt (5% rate), $200M mezz (10% rate), $200M equity. Enterprise value $900M. Post-deal, EBITDA drops 20%. What's the 'danger tranche'?
Five questions · AI feedback
Sit with the ideas.
An LBO target has $150M EBITDA and $40M capex. The proposed debt structure is: $300M Term Loan at 7%, $200M Senior Notes at 9%, and $100M Mezzanine at 13%. Mandatory amortization is $30M/year. Can the company cover its debt service?
Why: