Structured Credit, HoldCo Preferred Equity & LBO Waterfalls
HoldCo Preferred Equity PIK vs Min-MOIC Waterfall Formula
Calculate HoldCo Preferred Equity Compounded PIK Claim ($M), Senior Liquidation Payout With Minimum-MOIC Floor ($M), Residual Common Equity Proceeds ($M), and Sponsor Common MOIC (x).
Model the GREATER of compounded PIK and the Minimum-MOIC call-protection floor!
When LBO sponsors inject non-cash-pay HoldCo Preferred Equity rescue capital to cure senior leverage covenants without triggering a change-of-control, preferred investors negotiate a two-pronged senior liquidation preference ahead of common equity: Redemption_Claim = MAX(Pref_Invested * ((1 + r_PIK) ^ Hold_Years), Pref_Invested * Min_MOIC_Floor), capped at available Total Distributable Equity Value! In an early Year-2 refinancing or exit, the Minimum-MOIC Floor (e.g., 1.50x) exceeds 2-year compounded PIK (1.14^2 = 1.30x), skimming call-protection value out of common equity; in a longer Year-4 hold (1.14^4 = 1.69x), exponential PIK takes over!
Verify on an $80.00M HoldCo Preferred Recapitalization—Pref_Invested = $80.00M (B2), Annual_PIK_Dividend = 0.14 (14.0%, B3), Minimum_MOIC_Floor = 1.50x ($120.00M floor, B4), Hold_Period = 2.0 years (B5 -> Compounded PIK = 80 * 1.14^2 = $103.97M in E2), Exit_Total_Equity_Value = $260.00M (B6), and Sponsor_Common_Cost = $100.00M (B7): Senior Preferred Payout hits the 1.50x floor of $120.00M (E3), leaving $140.00M Residual Common Proceeds (E4) for a 1.40x Sponsor Common MOIC (E5)!
| HoldCo Preferred Waterfall KPI ($80M Pref @ 14% PIK & 1.50x Floor, $260M Exit) | Formula | Verified Output |
|---|---|---|
| Compounded PIK Accrual ($M) | Pref_M * ((1 + PIK_Rate) ^ Hold_Years) | $103.97M ($135.12M @ Yr 4) |
| Senior Preferred Payout ($M) | MIN(Exit_Equity_M, MAX(PIK_Claim, Pref * Min_MOIC)) | $120.00M ($135.12M @ Yr 4) |
| Residual Common Proceeds ($M) | MAX(0, Exit_Equity_M - Senior_Pref_Payout_M) | $140.00M ($124.88M @ Yr 4) |
| Sponsor Common MOIC (x) | Residual_Common_M / Sponsor_Common_Cost_M | 1.40x (1.25x @ Yr 4; 0.00x Wipeout) |
Dual-Pronged PIK vs Minimum-MOIC Preferred Waterfall Formula
Validate Pref_Invested > 0, PIK_Rate in [0, 0.35], Min_MOIC >= 1.0, Hold_Years > 0, Exit_Equity >= 0, and Common_Cost > 0!
=LET(pf_m, B2, pk_r, B3, mn_x, B4, yr_h, B5, ex_v, B6, cm_c, B7, IF(OR(pf_m <= 0, pk_r < 0, pk_r > 0.35, mn_x < 1, yr_h <= 0, ex_v < 0, cm_c <= 0), "Invalid Preferred Input", LET(pk_c, pf_m * ((1 + pk_r) ^ yr_h), cl_m, MAX(pk_c, pf_m * mn_x), ROUND(MIN(ex_v, cl_m), 2))))Year-4 PIK Crossover & $110M Distressed Common-Wipeout Checks
Extend Hold_Period B5 from 2.0 years to 4.0 years: Compounded PIK E2 overtakes the $120.00M floor at $135.12M, trimming Common Proceeds E4 to $124.88M (1.25x Common MOIC E5). Next test a distressed $110.00M exit (B6 = 110): Preferred takes all $110.00M E3 and Common Equity is wiped out at $0.00M E4!
=IF(ISTEXT(E3), E3, ROUND(MAX(0, B6 - E3) / B7, 2))Try the example
Use the original values or change them to test your understanding.