A finished FIN-660 Topic 2 buyout debt sizing memo example, running two debt levels through a downside year and covenant step-downs, and trading two points of base-case return for headroom. Searches like "fin 660 topic 2 assignment example", "fin660 topic 2 sample" and "fin-660 topic 2 example" land here.
What a finished FIN-660 Topic 2 buyout debt sizing memo looks like
In the finished memo the illustrative purchase price is 900 million, nine times last year's EBITDA of 100; debt costs 8 percent, and every dollar of free cash flow repays it. All amounts are in millions. The maintenance covenant caps debt at 6.0 times EBITDA in year one, 5.5 in year two and 5.0 thereafter. In the sponsor's base case, EBITDA grows from 104 to 120 and either structure passes easily; 550 of debt returns about 16.5 percent a year to equity against about 14.5 for 450. The memo then repeats the company's worst year, a 20 percent fall, in year two, taking EBITDA to 83. At 550 of debt, leverage reaches about 5.98 times, a breach, and stays in breach in year three. At 450 it peaks near 4.62.
How a FIN-660 Topic 2 example is structured
Deal, base case, downside and recommendation are the memo's four parts. The deal section states the price, the sources of funds and the covenant schedule from the term sheet. The base case projects five years of EBITDA, interest, tax, capital spending and the cash sweep for both debt levels, and computes the equity return on an exit at the entry multiple. A volatility section draws the downside from the company's own record, taking the worst decline in its last fifteen years. The downside table reruns both structures and marks each covenant test as passed or breached, with the headroom in turns. A passage explains what a breach hands the lenders: repricing, fees, tighter terms or control. The memo closes by recommending 450, pricing the two points of base-case return it gives up, and citing Michael Jensen's argument that debt disciplines managers as the reason not to go lower.
Covenant steps quoted from the term sheet
Maximum leverage of 6.0 times in year one, 5.5 in year two and 5.0 afterward is the constraint every projection in the memo is tested against.
A base case both structures pass
With EBITDA growing to 120 and cash sweeping debt, 550 returns about 16.5 percent a year and 450 about 14.5, and neither comes close to a covenant.
The worst year taken from the record
A 20 percent fall in EBITDA, the steepest in the company's last fifteen years, is repeated in year two rather than assumed at some generic rate.
Two breaches at 550, none at 450
Leverage reaches about 5.98 times against a 5.5 limit in year two and 5.36 against 5.0 in year three, while 450 peaks near 4.62.
Two points of return priced as insurance
Giving up about two points of base-case return buys headroom through the downside, which the memo argues is cheaper than a breach renegotiated from weakness.
Where marks go in FIN-660 Topic 2
A debt level read off last year's EBITDA multiple, with no test beyond it, is the paper this topic marks lowest, since the lenders' covenants are tested in every future year, including the bad ones. Papers that build only the sponsor's base case show a structure that works in the one scenario least likely to test it. A downside set at a round percentage the company's record never produced leaves the reader no reason to believe it. Ignoring the step-downs misses that the covenant tightens just as a recession would bite. Recommending the higher debt level because it raises the equity return treats the return as free of the breach risk that produces it. Memos that never state what a breach would cost, in fees, repricing or control, leave the trade between return and headroom unpriced.
Get a FIN-660 Topic 2 example written to your instructions
Send the FIN-660 Topic 2 instructions and your classroom rubric, with the deal terms your section supplies. We write a custom example to them, with the covenant schedule quoted, base and downside cases run for each structure, the downside drawn from the company's record, breaches marked with headroom and a debt level recommended, in 24 to 48 hours. The first one is free.
FIN-660 Topic 2 questions, answered
What is a maintenance covenant?
A condition in a loan agreement that the borrower must meet at regular test dates, often a maximum ratio of debt to EBITDA or a minimum interest coverage. Failing a test is typically an event of default even if every payment has been made, which gives lenders the right to demand changes, fees or repayment. Step-downs tighten the limit over time, on the assumption that the buyout will have repaid debt by then.
Why does more debt raise the sponsor's return?
Because the sponsor puts in less equity and the lenders' return is fixed, so any growth in the company's value beyond the interest cost goes entirely to a smaller equity stake. In the example, 550 of debt turns 350 of equity into about 752 at exit, while 450 of debt turns 450 into about 886. The same leverage magnifies a loss; the downside case measures how much.
Could the memo size debt for a real buyout?
Not on its figures. The distributor, its EBITDA path, the interest rate, the covenant schedule and the worst-year decline are invented, and the returns ignore fees and taxes on exit. Sizing a real loan depends on audited results, lenders' actual terms, due diligence and the sponsor's and lenders' own advisers. The memo is FIN-660 coursework on debt capacity and does not advise any party to a transaction.