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.…