Lever methodology
LBO, debt capacity and credit model by falcon.sol. Methodology version lever-deal-2026.10.28.
What the deal model does
POST /api/deal takes a target (financeable EBITDA, revenue, cash, debt, optional market cap) and deal parameters. It returns sources and uses, a period-by-period debt schedule, returns, an entry by exit multiple sensitivity grid, bank fees, credit statistics, four scenarios (Base, Hot Window, Window Slips, Credit Stress), a resolved assumptions block, warnings and units. The same inputs always give byte-identical output. No randomness, no clock, no live data inside the deal maths.
Conventions
| Item | Convention |
|---|---|
| Units | Money in $mm. Rates and percentages as decimals (0.095 = 9.5%). Multiples in x EBITDA. |
| Purchase price | Financeable EBITDA x entry multiple x (1 + premium). With a live market cap, equity at market cap x (1 + premium) plus refinanced debt. |
| Uses | Purchase, refinanced debt, financing fees (fee_pct x new debt, default 2.5%; treat OID the same way), advisory (default 1.0% of purchase), minimum cash (default 25). |
| Sources | New debt by tranche (turns x EBITDA, capped at the read's sector leverage cap), management rollover, then sponsor equity as the plug. Sources equal uses by construction. |
| Interest | Default: on the opening balance. Option interest_basis: "average" accrues on the average balance and solves the circularity by fixed-point iteration (tolerance 1e-7). |
| Taxes | (EBITDA - D&A - cash interest - PIK interest) x tax rate, floored at zero. The interest shield is included. |
| CFADS / FCF | CFADS = EBITDA - capex - cash taxes - change in NWC. FCF = CFADS - cash interest. |
| Waterfall | Mandatory amortisation off original face (TLB 1%/yr). Then the revolver is repaid, then sweep_pct (default 100%) of the remainder prepays term debt senior-first. Shortfalls draw cash to its floor, then the revolver. |
| PIK | Accretes to principal, is not swept, and is tax-deductible. |
| Covenants | Net leverage ≤ 6.5x, interest coverage (EBITDA / cash interest) ≥ 2.0x, DSCR (CFADS / (cash interest + mandatory amort)) ≥ 1.1x. Every breach year is flagged. |
| Returns | Exit EV = exit EBITDA x exit multiple, less net debt. Equity is floored at zero (limited liability). MOIC = exit equity / total equity in. IRR = XIRR on dated flows. |
| Stub periods | Fractional holds get a pro-rated final period. Coverage ratios stay annualised. |
Worked example (hand-verified, in the test suite)
EBITDA 100, revenue 400, 8.0x entry, no premium, fees or minimum cash, flat EBITDA, 25% tax, capex = D&A = 10. One Term Loan B at 4.0x and 10%, 1% amortisation, 100% sweep, 2-year hold, 8.0x exit.
| Sources and uses | $mm |
|---|---|
| Purchase (100 x 8.0x) | 800.0 |
| Term Loan B (4.0x) | 400.0 |
| Sponsor equity | 400.0 |
| Schedule | Year 1 | Year 2 |
|---|---|---|
| EBITDA | 100.0 | 100.0 |
| Cash interest (10% x opening) | 40.0 | 36.25 |
| Cash taxes (90 - interest) x 25% | 12.5 | 13.44 |
| Capex | 10.0 | 10.0 |
| CFADS | 77.5 | 76.56 |
| FCF after interest | 37.5 | 40.31 |
| Mandatory amortisation | 4.0 | 4.0 |
| Sweep | 33.5 | 36.31 |
| Closing debt | 362.5 | 322.19 |
| DSCR = CFADS / (interest + amort) | 1.76x | 1.90x |
| Interest coverage | 2.50x | 2.76x |
Exit: EV 800.0 - debt 322.19 = equity 477.81. MOIC 1.19x, IRR 9.3%. With interest_basis: "average", Year 1 interest solves to 36.625 / 0.9625 = 38.05.
Input validation
Bad inputs return HTTP 400 with every problem listed. For example, a tax rate of 25 gets "must be between 0 and 1 (decimal fraction)". The same goes for a coupon of 9.5 instead of 0.095, a hold over 30 years, negative cash or debt, and ownership splits that don't sum to 1.
Limitations
- Annual periods with end-of-period cash flows. No quarterly covenant testing, no LTM build.
- No interest-deduction cap (such as 163(j)). Fees and OID are expensed at close, not amortised for tax.
- Floating rates are flat coupons. No SOFR curve, floors or hedges.
- No dividends, recaps or interim distributions. IRR uses entry and exit flows only.
- Sensitivity cells hold exit debt at the base case and flex equity with the entry price. Debt is not re-solved per cell.
- Company data comes from public filings (SEC EDGAR) and may be stale or restated. Check figures before relying on them.
Not investment advice. Lever is an analytical tool for modelling. Outputs depend entirely on the inputs and conventions above. They are not a recommendation to buy, sell or lend, and not a credit rating or a fairness opinion.