Worked example — Global Chemicals Corp: EBITDA $70m. Proposed capital structure: 4x Senior TLB + 1x mezzanine. How do you structure the coupon and total cash cost?
Inputs:
- EBITDA: $70m
- Senior TLB: 4.0x EBITDA = $280m
- Mezzanine: 1.0x EBITDA = $70m
- Senior coupon: SOFR 3.5% + 425 bps = 7.75%
- Mezz: 8% Cash + 5% PIK
Calculation:
```
Senior Interest (Cash): 280 × 7.75% = $21.7m
Mezz Interest (Cash): 70 × 8% = $5.6m
Total Cash Interest: = $27.3m
Cash Interest Coverage: 70 / 27.3 = 2.56x
Mezz PIK accretes: 70 × 5% = $3.5m/year
```
Coverage of 2.56x is solid — lenders typically want at least 2.0x.
Deep diveShow more details
The $70m of mezzanine grows through the annual 5% PIK to ~$89m after 5 years. At exit the sponsor therefore repays not $70m of mezz but $89m. Compounding effect: not 5% × 5 = 25%, but (1.05)^5 − 1 = 27.6%.
- Year 1 cash out: $27.3m (senior + mezz cash)
- Year 1 non-cash: $3.5m PIK (accrued onto the mezz balance)
- Year 1 total yield: $30.8m = 8.8% on $350m total debt
Question: "Which coupon assumption would make you nervous?"
Answer: "If the senior coupon rises above 8.5% AND the mezz above 14% YTM, cash interest coverage falls below 2.0x — lenders will hesitate. At the current market range the structure holds, but every +100 bps of SOFR pushes coverage down by about 0.2x"