A sponsor signs an LBO with floating-rate debt, and rates rise before close. How much does the rate rise cost in paydown and IRR, and what would the sponsor change?

The rate rise leaves Rs 57 crore more debt at exit and costs about 0.8 points of IRR, 17.0% to 16.2%, if the exit multiple holds. The bigger risk is the second hit: buyers in a higher-rate market pay less, and at 7.5x the IRR falls to 14.4%. To restore 17.0% at 11% the sponsor would need to pay about Rs 1,574 crore, so it should hedge the rate, renegotiate price or put in less debt.

A family with a floating-rate home loan feels a rate rise twice: the instalment goes up, so less goes to principal, and the house is worth less to the next buyer, who also has to borrow at the new rate. In an LBO the first hit is mechanical: more interest means less free cash flow, so less debt is repaid and less equity is left at exit. At 9% Oshadi pays Rs 72 crore of interest in year 1; at 11% it pays Rs 88 crore. After tax the difference is Rs 12 crore, and it compounds, because each year's smaller repayment leaves a bigger balance accruing the higher rate.

Because the debt is only half the price and the cost is spread over five years. Exit EV is Rs 2,042 crore either way; exit equity falls from Rs 1,751 crore to Rs 1,694 crore, about 3%, so the IRR falls only from 17.0% to 16.2%. The second hit is larger. The buyer at exit faces the same higher rates, so it can borrow less and pays a lower multiple. If the exit slips from 8.0x to 7.5x, exit equity falls to Rs 1,567 crore and the IRR to 14.4%. Half a turn of multiple costs more than two points of interest, which is why interviewers ask how rates affect an LBO rather than how they affect interest.

Three levers, in order of how quickly they can be pulled. First, hedge: an interest rate capA contract that pays the borrower when a floating rate goes above an agreed level, limiting how much the interest bill can rise. or swap bought at signing would have locked the 9% and is the standard protection for exactly this gap between signing and close. Second, renegotiate: to earn 17.0% at 11% with the same debt, the sponsor would need to pay about Rs 1,574 crore, roughly 7.87x instead of 8.0x, though a signed deal rarely reopens without a material change clause. Third, refinance part of the debt at a fixed rate, or put in more equity, which lowers the interest drag but also lowers the IRR on a bigger cheque. A strong close says the paydown cost is modest, the exit multiple is the real exposure, and the lesson is to hedge between signing and closing.