hard · Investment Banking ma-lbo

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 supposedly is not, so paying the coupon in cash creates an incremental interest tax shield that lifts free cash flow available for reinvestment and therefore raises the sponsor's exit equity value at the end of the hold period
3. The revolver draw ranks senior in the capital structure to the seller's note, so the switch effectively subordinates the seller's claim below the bank debt, and the sponsor books that improved recovery ranking directly as incremental equity value realized at the exit date
4. Removing the PIK accretion lifts reported EBITDA since the accreted interest expense no longer flows through as a non-cash charge below the line, and at the unchanged exit multiple that higher EBITDA mechanically raises exit enterprise value and sponsor equity

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