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In 2013 the Federal Reserve issued guidelines for leveraged lending – specifically for buyouts, acquisitions and capital distribution. They identified a series of ‘red flags’ which effectively have put a ceiling on most leveraged lending. The most important for LBO modeling are:

• Leverage should not be more than 6x EBITDA – leverage includes any unused facilities/debt baskets/accordion facilities.

• 50% of the structure should be repaid within approximately 5 to 7 years.

• EBITDA cleaning earning adjustments (quality of earnings reports) which are not supported by third party due diligence.

• While some deals can still be executed outside these guidelines they will attract a significant amount more due diligence and risk management assessment.

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Leveraged Buy Out