medium · Private Equity accounting-flow
If a lender is granted 'Penny Warrants' alongside a PIK loan, how is the potential dilution handled in an LBO model's returns analysis?
- The warrants are simply ignored within the model unless the company later undergoes a full IPO event.
- The warrants are treated as a slice of the common equity pool at exit, reducing the sponsor's share of the proceeds
- The warrants are instead added directly to the outstanding debt balance and accrued at the stated PIK interest rate over time.
- The warrants reduce the stated cash interest expense that is recognized on the company Income Statement in each reporting period.
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