medium · Investment Banking
An LBO model shows a 'Cash Sweep' that prepays Senior Debt. If the Mezzanine tranche is PIK-only, how does the PIK interest interact with the sweep?
- The PIK interest is paid off first by the sweep because it is the most expensive.
- There is no interaction between the two.
- The sweep is reduced because the PIK interest is added to the debt balance.
- The PIK interest provides more cash for the sweep by generating a tax shield and requiring no cash interest.
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