Definition
Debt assumptions refer to the inputs used to define the structure, terms, and sizing of debt financing. These assumptions directly inform the Sources and Uses schedule and drive key elements of the post-transaction capital structure and cash flow profile.
They are essential for estimating interest expense, modeling debt repayment schedules, and assessing leverage and coverage ratios.
Typical Assumptions
Debt assumptions vary by deal and lender appetite, but commonly include:
- Debt Instruments: The types of debt used (e.g., Term Loan A, Term Loan B, revolving credit facility, subordinated debt, or bonds).
- Sizing: The amount of each tranche raised, often based on a multiple of EBITDA or a targeted leverage ratio.
- Interest Rates: Usually expressed as a base rate (e.g., SOFR) plus a margin; may be fixed or floating.
- Cash vs. PIK Interest: Whether interest is paid in cash or capitalized to the loan balance (common for subordinated or mezzanine debt).
- Amortization Profile: Scheduled principal repayments, typically minimal for Term Loan B and more structured for Term Loan A.
- Revolver Assumptions: Availability, drawn amount at close (if any), and undrawn commitment fees.
- Financing Fees and OID: One-time costs related to arranging the debt, which are capitalized and amortized over the life of the loan.
These inputs flow through to the Debt Schedule and drive interest expense, cash flow availability, and mandatory repayment capacity in the model.