medium · Private Equity & LBOs

If a lender is granted 'Penny Warrants' alongside a PIK loan, how is the potential dilution handled in an LBO model's returns analysis?

1. The warrants are ignored unless the company undergoes an IPO
2. The warrants are treated as a slice of the common equity pool at exit, reducing the sponsor's share of the proceeds
3. The warrants are added to the debt balance and accrued at the PIK rate
4. The warrants reduce the interest expense on the Income Statement

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