hard · Investment Banking

Assuming ample revolver capacity and no covenant breach, what is the cleanest explanation?

1. The PIK note accretes at 8%, so the seller's claim at exit balloons; cash-paying that coupon out of a cheaper 6% revolver shrinks the dollars owed to the seller faster than it grows the revolver balance, so net third-party debt at exit falls and sponsor equity rises
2. Cash interest is tax-deductible whereas PIK accretion is not, so paying cash creates an incremental interest tax shield that lifts free cash flow and therefore the sponsor's exit equity value
3. The revolver draw ranks senior to the seller's note, so the switch subordinates the seller and the sponsor books that recovery-rank improvement as added equity value at exit
4. Removing PIK accretion lifts reported EBITDA, and at the unchanged entry exit multiple that higher EBITDA mechanically raises exit enterprise value and thus sponsor equity

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