Module IV· Debt TranchesIntermediate
Question
Worked example: $100m mezzanine, 8% cash coupon, 5% PIK, 7-year maturity. Compute the Year-7 balance and total cash cost.
Answer
Worked example
$100m mezzanine, 8% Cash + 5% PIK, 7-year maturity.
Mechanics
PIK accretes year-over-year onto principal:
Deep diveShow more details
| Year | Year-begin balance | PIK (5%) | Year-end balance | Cash coupon (8% on begin) |
|---|---|---|---|---|
| 1 | 100.0 | 5.0 | 105.0 | 8.0 |
| 2 | 105.0 | 5.25 | 110.25 | 8.4 |
| 3 | 110.25 | 5.51 | 115.76 | 8.82 |
| 4 | 115.76 | 5.79 | 121.55 | 9.26 |
| 5 | 121.55 | 6.08 | 127.63 | 9.72 |
| 6 | 127.63 | 6.38 | 134.01 | 10.21 |
| 7 | 134.01 | 6.70 | 140.71 | 10.72 |
| Total | -- | 40.71 | -- | 65.13 |
Consequence
- Year-7 balance: $140.71m (= 100 + 40.71 PIK)
- Total return to lender over 7 years: $65.13m cash coupon + 100 principal repayment + 40.71 PIK repayment = $205.84m total return to lender (of which only $65.13m is true cash cost; PIK repayment is accreted principal)
- Effective YTM: ~13% (8% Cash + 5% PIK compounded)
Pitch tip
Question: "What if the sponsor wants to repay the mezz before Year 7?"
Answer: "A soft-call premium — typically 102/101/100 in Year 3/4/5 against par. The soft-call premium makes it economically unattractive, so the sponsor rarely repays mezz voluntarily"