How Sponsors Finance Buyouts: The Coverage Banker's View

Introduction

Leverage in a buyout is quoted as a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA), and the EBITDA is negotiated. A lender offering 6.0x a company's reported EBITDA of $100 million is offering $600 million. A second lender offering 5.5x on $112 million, after crediting cost savings and one-off items the sponsor has argued for, is offering $616 million: more money at the lower multiple. Every other line of a proposal behaves the same way. The margin means little without the fees and discount paid up front, a covenant means little without the definitions behind its ratios, and a commitment means little without its conditions. When a sponsor collects proposals from banks and direct lenders for a leveraged buyout (LBO), the coverage banker in the financial sponsors group (FSG) translates them into a common currency and shows what each costs at closing and in the years when the company wants to buy add-ons, pay dividends or refinance. That translation starts with what the sponsor wants from its debt, and the wants conflict.

A sponsor's brief to its lenders usually reduces to a short list of asks, and the coverage banker's first job on a live deal is learning which of them the client will pay for:

Behind these sit portability, whether the debt can stay with the company on a sale, and the identity of the lenders, each a counterparty in every future amendment.

Quantum, Cost and Certainty Pull Against Each Other

The asks conflict because each is bought with another. More leverage narrows the group of lenders willing to hold the risk and widens the spread they demand, so the last turn of debt costs far more than the first. Certainty carries its own price. A direct lender that will hold the whole loan can quote final terms quickly, usually at a wider spread; banks underwriting a loan they intend to sell often quote a tighter margin but keep the right to change pricing and structure within agreed limits if investors resist, the mechanics set out in underwriting and commitment letters.

Flexibility is priced least visibly. A permissive document rarely shows up in the margin; it shows up as lender protection the sponsor did not have to give. The instrument comparison of the two lender markets belongs to the debt capital markets guide's comparison of broadly syndicated loans and private credit; from the coverage seat, each market sells a different bundle of these asks.

How the Sponsor's Situation Sets the Order

The ranking moves with the deal: the same sponsor can lead with certainty on a take-private and with flexibility on a platform acquisition. The patterns below are tendencies that vary by market and lender appetite:

The ranking also explains why the cheapest bank can lose. A sponsor may favor the lender that held its last loan through a difficult year, or the bank whose balance sheet it wants on the next deal, as traced in how sponsors choose their banks. Relationship value is a real column in the sponsor's head even when it never appears on the page.

Proposals arrive in different shapes: a bank term sheet with a flex schedule, a direct lender's indicative letter, a bond-and-loan structure with a bridge behind it. The analyst's side-by-side grid is described in the FSG workstream map. The harder work is normalization: restating every offer on the same EBITDA, cost convention and downside, so the sponsor's ranking is applied to comparable numbers.

Leverage Depends on Whose EBITDA

Lenders size and test debt on covenant EBITDA, the earnings figure defined in the credit agreement, not on the audited accounts. The definition starts from reported earnings and then permits adjustments, which the sponsor proposes and each lender accepts in part.

EBITDA Add-Backs

Adjustments that increase a borrower's EBITDA for debt-sizing and covenant purposes above the reported figure. They typically remove one-off and non-cash costs, include the full-year earnings of acquired businesses, and credit cost savings or synergies expected but not yet achieved, often subject to caps and time limits set in the credit agreement.

The adjustments differ in quality. Removing a one-off restructuring charge is rarely contested; crediting run-rate synergies that depend on closing a plant next year is a forecast. Lenders that accept forward-looking add-backs usually limit them, to a percentage of EBITDA, to actions expected within a set period, or both, and the caps and periods themselves become negotiating points. A carve-out shows the problem at its sharpest, because the business has never reported standalone earnings at all, as the standalone EBITDA bridge in the carve-out playbook illustrates.

Who the lender is changes what it can accept. For the large euro-area banks it supervises, the European Central Bank (ECB) still applies its 2017 guidance on leveraged transactions, which asks that leverage above 6.0x total debt to EBITDA at inception remain exceptional and that any enhancements to EBITDA be duly justified and reviewed by a function independent of the front office. Two US bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, withdrew their equivalent guidance in December 2025, as discussed in how sponsors evaluate a deal, and direct lenders were never bound by either. Two lenders can therefore read the same quality-of-earnings report and credit different numbers for supervisory reasons rather than credit ones.

Pricing: Margin, Floor, Discount and All-In Yield

A floating-rate loan is priced as a margin over the Secured Overnight Financing Rate (SOFR) in the US or the Euro Interbank Offered Rate (Euribor) in Europe, with a floor setting the minimum base rate. Lenders also take original issue discount (OID), funding less than face value while the company repays it in full, and sometimes upfront fees that work the same way. To compare a loan sold at 99.5 with one sold at 98.0, the market spreads the discount over an assumed life, conventionally three years, on the assumption that loans are often repaid or refinanced before maturity:

Two other terms change what the yield is worth to the sponsor. Call protection decides what repaying early costs: a syndicated term loan typically carries a short soft call that charges a premium only on a repricing, while private credit loans and bonds tend to impose longer non-call or prepayment-premium periods. Maturity decides when the company must return to market; the standard tenors and their mechanics are covered in the term loan B article.

Two Offers for the Same Company

Consider an illustrative company with $100 million of reported EBITDA and a sponsor case of $115 million after add-backs. A bank-led group offers a syndicated term loan; a club of direct lenders offers a unitranche. Assume a base rate of 4.0% for both:

The headline favors Offer B: a higher multiple and $14 million more debt. Restated, after the larger discount, Offer B delivers only about $4.5 million more cash toward the purchase price, and it costs about $12 million more in interest every year while leaving coverage of reported earnings below 2x.

Here the sponsor's ranking decides. In a contested auction it may accept Offer B's cost to remove flex and syndication risk; buying a stable business in an open market, it will usually take Offer A and keep the coverage.

Pricing is paid every quarter; covenant terms decide what the company may do between those quarters, and therefore which future mandates are possible without asking lenders.

Maintenance Tests, Incurrence Tests and Equity Cures

A maintenance covenant tests a ratio, usually net leverage, every quarter, and breaching it is a default even if the company has done nothing new. An incurrence covenant is tested only when the company takes an action, such as borrowing more or paying a dividend. Syndicated term loans are now mostly covenant-lite, with a single springing test on the revolver that applies only when drawings pass a threshold; the shift is traced in the debt capital markets guide's cov-lite article.

Private credit loans more often keep a maintenance test, so the comparison turns on the cushion: how far EBITDA can fall, measured on the lender's own definition, before the test fails. Most of these documents also allow an equity cure, letting the sponsor inject equity that counts as EBITDA for the test, usually limited in how often it can be used. A tight test with a generous cure can protect a sponsor as well as a loose test with none.

Incremental Debt, MFN Protection and Payment Baskets

For a sponsor planning acquisitions, the most valuable line is often the capacity to add debt under the same agreement.

Free-and-Clear Incremental Capacity

The amount of additional debt a borrower may raise under an existing credit agreement without meeting any leverage test, often set as the greater of a fixed amount and a percentage of EBITDA. Further incremental debt above it is usually allowed only while a leverage ratio stays under an agreed level.

Existing lenders protect themselves with a most favored nation (MFN) clause: if new incremental debt is priced above the existing loan by more than an agreed cushion, the existing margin rises by the excess, so the gap that remains equals the cushion, sometimes only for a limited period after closing. Alongside sit the restricted payments and investments baskets, which cap dividends, distributions to the sponsor and transfers outside the group of companies that guarantee the debt. A sponsor planning a dividend recap reads these clauses before the margin. How they fit together in a document is walked through in a guide to reading a credit agreement.

The coverage banker's question is whether the capacity matches the plan. A buy-and-build platform expecting three acquisitions in two years needs incremental room, often a delayed-draw term loan, and an MFN it can live with; how that capacity is pre-wired is the subject of add-on financing.

Portability and the Exit

A sale of the company normally ends its debt: the change of control is an event of default or a mandatory repayment trigger, so the buyer must refinance.

Debt Portability

A credit agreement provision that lets a borrower's debt remain in place after a change of control, provided conditions are met, typically a leverage ceiling at the time of sale, limits on who may buy and a single use within a set period. It lets a sponsor offer buyers ready-made financing.

For the seller, portability shortens the next buyer's financing process and can widen the field of bidders; for lenders, it means accepting an owner they did not choose, so they price it, cap it with a leverage test or refuse it. It is negotiated at entry, years before anyone knows who the buyer will be.

The best-known examples are J.Crew's 2016 transfer of trademarks to an unrestricted subsidiary and the uptier exchanges that followed, mapped in the restructuring guide's drop-down article. Flexibility negotiated at entry is the same flexibility a stressed sponsor reaches for later, and lenders now price their memory of it.

Once the asks are ranked, the instruments are choices among bundles. The main options in a sponsor package are:

The junior instruments are explained in the debt capital markets guide's unitranche and second-lien article, and the choice between the two lender markets, with the bank partnerships it produced, in syndicated versus private credit. "How would you finance this LBO?" is a common interview question, and the answers that hold up start from the asset's cash flow, collateral and the sponsor's plans before naming instruments.

Univar Solutions: An Asset-Heavy Package Under Apollo

Univar Solutions, a chemicals and ingredients distributor, shows how a package mixes these pieces around the asset. Funds managed by Apollo agreed in March 2023 to buy the company for $36.15 a share, about $8.1 billion of enterprise value, with a minority investment from a subsidiary of the Abu Dhabi Investment Authority (ADIA). Univar's merger proxy describes about $3.8 billion of equity commitments and debt commitment letters from JPMorgan Chase Bank and other financial institutions for a $2.10 billion senior secured term loan, a $2.0 billion senior secured bridge facility and a $1.4 billion asset-based revolving facility. The merger was not conditioned on the financing.

The final package looked different. According to the lenders' counsel, Cahill, it comprised a $2.4 billion term loan B, a €870 million term loan B, $800 million of senior secured notes due 2030, and asset-based revolvers of $1.0 billion, C$250 million and €150 million with borrowers in Canada, the UK, the Netherlands and Belgium. The deal closed on August 1, 2023, when, according to Univar's closing report, the company repaid its existing term and ABL credit agreements and redeemed $454 million of 5.125% notes. Read as answers to the asks, each piece has a job:

Term loans and notes of roughly $4.2 billion against an $8.1 billion enterprise value left nearly half the price to equity. The commitment fixed the amount of money at signing; it did not fix the mix that eventually funded it.

As the loans were marketed, Univar furnished a Form 8-K on its lender presentation under Regulation Fair Disclosure (Regulation FD), stating that the company, the Apollo funds and their representatives were presenting information to prospective lenders, and setting out that information in the filing itself.

The comparison is built in a fixed order, each step depending on the one before. Leveraged finance (LevFin) owns the bank's own offer; the coverage team owns the sponsor's view of all of them. The covenant stress is where close offers separate, since a cushion that looks comfortable on the sponsor's numbers can sit near a breach on the lender's definition. Conditionality comes last because it sits on another axis: under the limited-conditionality terms described in sponsor commitment letters and reverse termination fees, a lender's outs should mirror the buyer's, and any extra condition is risk the sponsor carries alone.

One comparison is often left off the grid entirely: what it costs to leave each offer. Acquisition debt can end well before its maturity date in several ways. A sale ends it unless the debt is portable, a repricing follows if spreads tighten once call protection lapses, and a refinancing or recapitalization can come sooner still. Each of those exits passes through terms fixed at signing: call protection decides when a repricing pays, MFN and incremental terms decide whether new debt needs the old lenders' consent, and portability decides whether the debt can travel with the company to its next owner.

Read that way, the two illustrative offers separate once more. The unitranche's two-year prepayment premium makes it the more expensive offer to leave early, while the term loan's six-month soft call makes it the cheaper one to reprice, the trade covered in refinancings and repricings for sponsor portfolio companies. A sponsor that picks Offer B for certainty is also buying a costlier way out. An offer is best judged from the transaction most likely to end it, and on a sponsor-owned company that transaction is often only a few years away.