LBO Series · Guide 08

Debt Schedule Walkthrough

The debt schedule is where most candidates get lost in LBO models. This is the complete guide to mandatory vs. optional paydown, revolvers, PIK toggle mechanics, and the cash sweep.

Why the Debt Schedule Matters

In an LBO, the debt schedule does three things: (1) tracks beginning and ending debt balances by tranche, (2) calculates interest expense for the income statement, and (3) models how free cash flow is allocated to debt repayment. Get this wrong and your IRR is wrong.

The debt schedule is also where interviewers separate candidates who've actually built models from those who've only read about them.

Types of Debt Repayment

1. Mandatory Amortization

Required principal repayments scheduled in the credit agreement. Term Loan B typically requires 1% per year amortization (called the "1% amortization" or "TLB amort"). This is non-discretionary — it happens regardless of FCF.

TLB Mandatory Amort = Beginning TLB Balance × 1%

2. Optional / Excess Cash Sweep

After mandatory debt payments, all remaining FCF is "swept" to pay down debt — starting with the highest-cost tranches. In the credit agreement, this is called the "excess cash flow sweep" and typically ranges from 25%–100% of excess FCF (reducing as leverage improves).

Excess Cash Sweep = FCF − Mandatory Amort − Minimum Cash Balance

The order of paydown (the "waterfall"):

Revolver (if drawn)
Most expensive debt (highest interest rate), which is usually senior notes or second lien
Term Loan B
Any remaining cash builds on the balance sheet (rare in model)

3. Revolver Draw / Repayment

The revolving credit facility is a working capital cushion. In the model, it gets drawn if the company runs low on cash (e.g., during a seasonal trough or working capital build). It gets repaid first when cash is available.

Revolver Draw = MAX(0, Cash Needed − Cash Available)

Revolver Repayment = MIN(Revolver Balance, FCF Available)

The Full Debt Schedule — Worked Example

Using the same company: $1,750M TLB at 1% amort, $750M Senior Notes at 8.5% fixed, $300M Revolver (undrawn at entry).

Complete Debt Schedule ($M) — 5-Year Model

Line Item	Entry	Y1	Y2	Y3	Y4	Y5
Revolver
Beginning Balance	0	0	0	0	0	0
Draw / (Repayment)	—	0	0	0	0	0
Ending Balance	0	0	0	0	0	0
Interest Rate	—	SOFR+275	—	—	—	—
Cash Interest	—	0	0	0	0	0
Term Loan B (1% Annual Amort)
Beginning Balance	1,750	1,750	1,715	1,522	1,321	1,115
Mandatory Amort (1%)	—	(18)	(17)	(15)	(13)	(11)
Optional Paydown	—	(17)	(176)	(186)	(193)	(207)
Ending Balance	1,750	1,715	1,522	1,321	1,115	897
Interest Rate (all-in)	—	8.75%	8.75%	8.75%	8.75%	8.75%
Cash Interest	—	153	150	133	116	98
Senior Notes (8.5% Fixed)
Beginning Balance	750	750	584	0	0	0
Mandatory Amort	—	0	0	0	0	0
Optional Paydown (Excess FCF)	—	(166)	(584)	0	0	0
Ending Balance	750	584	0	0	0	0
Cash Interest	—	64	50	0	0	0
Totals
Total Debt	2,500	2,299	1,522	1,321	1,115	897
Total Cash Interest	—	217	200	133	116	98

PIK Toggle Mechanics

PIK (Payment-in-Kind) is an interest structure where the borrower can "toggle" between paying cash interest and accruing it to the principal. Used in mezzanine debt and second lien bonds when cash is tight.

PIK Accrual = Beginning Balance × PIK Rate

New Principal = Beginning Balance + PIK Accrual (instead of cash payment)

Why PIK Is Expensive

Say you have $100M of PIK debt at 12%. In Year 1 you pay $0 cash but your balance becomes $112M. In Year 2 you owe interest on $112M = $13.4M in PIK. It compounds. A $100M PIK note at 12% becomes ~$176M after 5 years. That's $76M of additional exit debt that directly reduces your equity at exit.

The Revolver: When It Gets Drawn

In most LBO models, the revolver starts undrawn. It gets drawn in two scenarios:

Working capital seasonality — In Q1, the company may need to build inventory or extend receivables before collecting cash. The revolver covers the timing gap.
Stress scenarios — If EBITDA drops significantly (e.g., 20% decline), FCF may be insufficient to cover interest, forcing a revolver draw.

In an interview model, unless you're told to model seasonality, keep the revolver undrawn in the base case and use it only in the stress case. The commitment fee (typically 0.25%–0.5% on undrawn balance) is a small item but shows attention to detail.

Circular Reference: The Interest Expense Loop

Here's the hard part most candidates get wrong: debt balance depends on FCF, FCF depends on interest expense, and interest expense depends on debt balance. This creates a circular reference.

The proper solution in Excel: use iterative calculations (File → Options → Formulas → Enable iterative calculation). In an interview model or simplified version: use beginning-of-period debt balance to calculate interest (eliminating the circularity at the cost of slight inaccuracy).

Simple Approach: Interest = Beginning Balance × Rate (avoid circularity)

What Interviewers Expect You to Know

TLB typically has 1% annual mandatory amortization with a bullet maturity (full remaining balance due in Year 7)
Senior notes typically have zero amortization — interest-only until maturity
The excess cash flow sweep is applied to the most expensive debt first (highest IRR on paydown)
Commitment fees on the undrawn revolver are small but should be in the model
PIK interest accretes to principal and compounds — it's much more expensive than it appears
Cash interest = SOFR (or reference rate) + spread, on beginning period balance as a simplification

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