Case 036Leveraged buyoutsHard

Paper LBO: a sponsor buys a speciality chemicals business at 7x with amortising senior debt and a PIK mezzanine note, and adds a bolt-on in year 2. Work out the money multiple and IRR.

Bank of AmericaLondon · 2026

The situation

A sponsor buys Kimiya Speciality for 7.0x EBITDA of Rs 150 crore, Rs 1,050 crore. It borrows senior debt of 3.0x, Rs 450 crore, at 7.5%, amortising 10% of the original amount each year, and a mezzanine note of 1.5x, Rs 225 crore, at 12% paid in kind. Equity funds the rest. Ignore fees.

Half of EBITDA each year is available for debt service, after tax, capex and working capital; it pays senior interest and amortisation, and any surplus prepays senior debt. EBITDA grows 6% a year. At the end of year 2 Kimiya buys a rival with Rs 20 crore of EBITDA for 6.0x, Rs 120 crore, funded with new senior debt that also amortises 10% a year; the rival's EBITDA counts from year 3 and grows 6%. The sponsor exits after year 5 at 7.0x.

Your task

What are the money multiple and IRR, and which pieces of the structure create or consume the return?

Quick check

Before working it through: roughly what IRR do you expect?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

About 2.46x the money and an IRR of about 19.7%. Exit EBITDA of Rs 223 crore at 7.0x is worth Rs 1,562 crore. Senior debt is paid down to Rs 245 crore, but the PIK note compounds to Rs 397 crore, leaving equity of about Rs 921 crore on Rs 375 crore. Organic growth and senior paydown create the return; the bolt-on adds a little; PIK interest quietly takes back Rs 172 crore.

Step 1How is the deal funded on day one?

Rs 1,050 crore of price is funded with Rs 450 crore of senior debt, Rs 225 crore of mezzanine and Rs 375 crore of equity, 4.5x total leverage. The two debt tranches behave in opposite ways: senior shrinks every year as cash repays it, while the PIKPayment in kind: interest added to the loan balance instead of being paid, so the debt compounds. mezzanine grows every year because its interest is added to the balance. It is like repaying a home loan from salary while a family loan quietly accrues interest in the background.

Step 2How does the cash flow each year?

Half of EBITDA pays senior interest first, then the Rs 45 crore of scheduled amortisation, then any surplus prepays senior. In year 1, Rs 79.5 crore of cash covers Rs 33.8 crore of interest and Rs 45 crore of amortisation with only Rs 0.8 crore to spare, so the structure is tight at the start. The bolt-on adds Rs 120 crore of senior debt at the end of year 2, Rs 12 crore a year of extra amortisation and Rs 9 crore of extra interest; its own cash, half of Rs 20 crore, does not cover that, and the growing core business makes up the difference.

Year	EBITDA	Cash for debt	Senior interest	Senior repaid	Senior at end	PIK note at end
1	159.0	79.5	33.8	45.8	404.2	252.0
2	168.5	84.3	30.3	54.0	470.3 (+120)	282.2
3	198.7	99.3	35.3	64.1	406.2	316.1
4	210.6	105.3	30.5	74.8	331.4	354.0
5	223.2	111.6	24.9	86.7	244.7	396.5

Rs crore. Senior debt is repaid from half of EBITDA after interest, rises by Rs 120 crore for the bolt-on at the end of year 2, and ends at Rs 244.7 crore; the PIK note compounds at 12% from Rs 225 crore to Rs 396.5 crore.

At 7.0x pro forma EBITDA, Kimiya's equity value grows from Rs 375 crore to Rs 921 crore as senior debt is repaid to Rs 245 crore, even though the bolt-on adds Rs 120 crore of senior debt in year 2 and the PIK note grows to Rs 397 crore.

Step 3What are the returns?

The relationship

\text{MOIC} = \frac{1{,}562.4 - 244.7 - 396.5}{375} = 2.46\times \qquad \text{IRR} = 2.46^{1/5} - 1 = 19.7\%

1,562.4	exit enterprise value: 7.0x year 5 EBITDA of 223.2
244.7	senior debt left at exit
396.5	the PIK note, with five years of interest added
375	equity at entry

What it says in wordsExit equity is what the business is worth less both debt tranches; the IRR is the yearly rate that turns 375 into that over five years.

Step 4Which pieces create the return, and which consume it?

Split the gain, because the follow-ups always go there. Organic growth at a constant 7x adds Rs 355 crore and senior paydown adds Rs 325 crore; the PIK note takes back Rs 172 crore. The bolt-on, bought at 6x and worth 7x inside Kimiya, adds a net Rs 37 crore: Rs 157 crore of exit value for Rs 120 crore of debt. Buying earnings below the exit multiple creates value without the business changing, and naming that is what the interviewer is listening for.

Sponsor equity grows from Rs 375 crore to Rs 921 crore: Rs 355 crore from organic growth, Rs 37 crore from the bolt-on bought at 6x and worth 7x, and Rs 325 crore of senior debt repaid, less Rs 172 crore of PIK interest added to the mezzanine.

Close with the limit. If the mezzanine had paid cash instead, it would have stayed at Rs 225 crore and the IRR would be about 23.9% before allowing for the cash that interest would have used, so PIK looks cheap only because nobody writes a cheque. And the year 1 cushion of under Rs 1 crore means a small miss on EBITDA would need a revolver, which a lender will ask about first.

Where candidates lose it

The usual loss is treating the mezzanine as a fixed Rs 225 crore at exit. It is PIK: five years at 12% turns it into about Rs 397 crore, and forgetting that adds about Rs 170 crore to equity and pushes the IRR to about 24%.

The second is giving the bolt-on value without its debt, or counting its EBITDA from year 2. It is bought at the end of year 2 with Rs 120 crore of new senior debt, and earns from year 3.

What the interviewer asks next

The exit multiple falls to 6.0x. What happens to the IRR, and who absorbs the loss first?
Would you rather fund the bolt-on with sponsor equity than senior debt? Show what changes.
How much EBITDA could Kimiya lose in year 1 before it fails to meet scheduled amortisation?

Asked at Bank of America, Investment Banking, London, 2026 (Wall Street Oasis): Super hard paper LBO. Multi-tranche, bolt-ons, not a bullet repayment.

Company names and figures are illustrative.