hard · Private Equity accounting-flow
In an LBO, a sponsor funds part of the purchase with $150M of PIK (payment-in-kind) preferred at a 12% rate that accretes annually and is NOT cash-pay. The company also has $400M of cash-pay term debt at 7%. EBITDA is $200M, D&A $50M, capex $45M, cash tax rate 25%, no working-capital change.
Ignoring any tax deductibility question on the PIK for a moment, what is the Year-1 cash flow available to amortize the cash-pay term loan, and how does the PIK accretion affect the period's leverage?
- $92.75M of cash sweep; PIK accretes $18M, raising total net debt despite term-loan paydown
- $74.75M swept; the $18M PIK accretion is wrongly booked as a cash interest outflow
- $92.75M of cash sweep; PIK accretion is assumed to lower net debt since the $18M is non-cash
- $110.75M of cash sweep; the $18M PIK preferred obligation is excluded entirely from the leverage calc
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