medium · Investment Banking accounting
A portfolio company with $250.0 million of 12.0% PIK debt is undergoing an exit. At the end of Year 3, the principal has grown to $351.2 million.
If the exit Enterprise Value is $1.0 billion, how does the PIK debt affect the proceeds to the sponsor?
- The sponsor only pays the initial $250.0 million principal; the interest is forgiven at exit.
- The 101.2 million in accrued interest is treated as a transaction expense and deducted from EBITDA.
- The sponsor's equity proceeds are reduced by the full $351.2 million ending balance.
- The PIK debt is converted into equity at the exit, so it does not reduce proceeds.
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