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entity that they use to acquire the target company. After a buyout, the target
becomes a subsidiary of the new company, or they merge to form one
company.
Bank Debt
Bank debt is also referred to as senior debt, and it is the cheapest form of
financing instrument used to acquire a target company in a leveraged buyout,
accounting for 50-80% of LBO capital structure. It has a lower interest rate
than other financing instruments, making it the most preferred by investors.
However, bank debts come with covenants and limitations that restrict a
company from paying dividends to shareholders, raising additional bank debts
and acquiring other companies while the debt is active. Bank debts have a
payback time of 5 to 10 years. If the company liquidates before the debt is
fully paid, bank debts get paid off first.
Mezzanine Debt
Equity
Credit metrics
One of the keys to building an LBO model is making sure the credit metrics
and debt covenants work for the deal. In the screenshot below you will see
how an Analyst would model the credit metrics for this leveraged buyout.
Debt/EBITDA