Investment Banking, 3rd Edition

CHAPTER 5LBO Analysis

LBO analysis is the core analytical tool used to assess financing structure, investment returns, and valuation in leveraged buyout scenarios. The same techniques can also be used to assess refinancing opportunities and restructuring alternatives for corporate issuers. LBO analysis is a more complex methodology than those previously discussed in this book as it requires specialized knowledge of financial modeling, leveraged debt capital markets, M&A, and accounting. At the center of LBO analysis is a financial model (“LBO model”), which is constructed with the flexibility to analyze a given target’s performance under multiple financing structures and operating scenarios.

Financing Structure

On the debt financing side, the banker uses LBO analysis to help craft a viable financing structure for the target, which encompasses the amount and type of debt (including key terms outlined in Chapter 4) as well as an equity contribution from a financial sponsor. The model output enables the banker to analyze a given financing structure on the basis of cash flow generation, debt repayment, credit statistics, and investment returns over a projection period.

The LBO financing structure analysis is typically spearheaded by an investment bank’s leveraged finance and capital market teams (along with a sector coverage team, collectively the “deal team”). The goal is to present a financial sponsor with tailored financing options that maximize returns while remaining marketable ...