White Oak Intelligence Posted on May 31 • Originally published at whiteoakintel.com Cash Flow Waterfall Model for LBO # analytics # programming # python # tutorial In This Article How Waterfall Priority Works Modeling the Debt Structure Python Implementation DSCR Interpretation Working Example: Manufacturing LBO When to Refinance vs. Repay How Waterfall Priority Works In a leveraged buyout, cash does not flow freely to equity until every obligation above it in the capital structure has been satisfied. That sequencing — senior debt first, mezzanine second, equity last — is what a waterfall model formalizes. Get the order wrong and you will either overstate free cash flow to equity or miss a covenant breach entirely. The mechanics are straightforward: operating cash flow enters the top of the waterfall. From there, it cascades through each tranche in strict priority order. What remains after each tranche's interest and required principal is the cash available to the next level. What exits the bottom is the true free cash flow available to equity holders — often a very different number than EBITDA minus interest expense suggests. Why This Matters EBITDA-based valuations routinely overstate equity value by treating all debt as equal. A 9M in senior debt at 8.5% and 1.3M in true free cash flow after full service — not $3.9M. The difference can make or break a deal thesis. Modeling the Debt Structure Every LBO waterfall model starts with an accurate representation of each debt tranche. The minimum attributes you need for each instrument are the outstanding principal, the annual interest rate, and the required annual principal payment. In practice you also want the tranche name and its position in the priority stack, since that order drives everything else
LIVE