OID and Financing Fees in LBO Interviews: Cash vs P&L vs Debt

OID and financing fees are where neat LBO sketches get messy. Interviewers use them to see if you know what cash leaves at close versus what hits interest over time. You do not need a full accounting seminar. You need clean sources and uses and a debt schedule that still owes par.

The short answer

"Financing fees are usually cash costs at close in sources and uses. OID means lenders fund less than par while we owe par, which raises effective yield. I separate cash interest from non-cash accretion in the debt schedule and I make sure uses reflect fees so sources still balance."

Short definitions

Sources and uses impact

Fees and OID-like economics usually increase uses (or reduce net debt proceeds in sources). If you need $200 of debt principal for the capital structure but OID is 2 points, cash proceeds may be about $196 while you still owe $200. The equity plug often rises to close the gap.

P&L and cash over the hold

• Cash interest follows the coupon on the contractual base the credit agreement defines
• OID accretion / fee amortization often increases effective interest expense without the same cash out
• On CFS, non-cash interest accretion is added back, similar in spirit to other non-cash interest

You need: cash fee at close; non-cash accretion over time; debt still owed at par.

Mini example

Term loan par $100. OID 2%. Arrangement fee 1% cash on par.

• Cash to S&U from this tranche is about $98 after OID
• Uses may include $1 fee (or fee taken from proceeds) depending on prompt
• You still amortize / repay based on $100 par economics unless told otherwise

Why returns care

Higher fees / OID:

1. Increase equity check or reduce cash at close
2. Raise effective cost of debt
3. Can change covenants that reference consolidated interest
4. Slightly change IRR if opening cash and interest differ from a fee-free sketch

In a quick paper LBO, fees matter mostly through the equity plug. In an Excel test, they also matter through the interest build.

Paper LBO note

In a 10-minute paper LBO, fees are often given as a percent of EV or debt. Fold them into uses, increase the equity plug, and move on. Save OID accretion detail for Excel tests unless they ask. If they give both OID and cash fees, do not double-count the same economic cost.

Checklist at close

1. Sources = uses including fee line items
2. Opening debt schedule starts at correct par / drawn amount
3. Cash interest and non-cash interest separated if required
4. Revolver undrawn fees (commitment fees) not confused with OID
5. Refinancing fees in a dividend recap treated as a new close event, not forgotten

Common mistakes

1. Ignoring fees so sources exceed true cash need
2. Reducing the debt balance by fees permanently when you still owe par
3. Forgetting fee amortization in interest when the prompt requires it
4. Mixing commitment fees on undrawn revolvers with OID on funded term debt
5. Treating OID as "free money" rather than higher yield for lenders

Verbal follow-ups to expect

1. Walk sources and uses with a 2% OID
2. Does OID change the opening debt balance on the schedule?
3. Where does fee amortization show up in CFO?
4. How do fees change MoIC if exit EV is unchanged?

For (2), answer carefully: contractual principal owed is still par; accounting carrying value may start lower and accrete. In most interview models, keep a par balance for cash sweeps and show accretion separately if required.

30-second verbal

"Financing fees are usually cash costs at close in sources and uses. OID means lenders fund less than par while we owe par, which raises effective yield. I separate cash interest from non-cash accretion in the debt schedule and I make sure uses reflect fees so sources still balance."

Related

Sources and Uses in LBO Interviews and Debt Schedules. For non-cash interest cousins, see PIK Interest.