Leveraged Finance Simulation

This simulation places you at the heart of a leading investment bank, challenging you to structure and syndicate debt for a major Leveraged Buyout. Can you balance the competing demands of clients, investors, and market forces to close a profitable deal?

Leveraged Finance Simulation Overview

In the Leveraged Finance Simulation participants form teams acting as the LBO group of a premier investment bank. Participants are tasked with advising a private equity firm on the acquisition of a target company.

The core challenge is to design the optimal debt package, while comprising senior secured loans, high-yield bonds, and mezzanine debt. That package should maximize leverage while ensuring the deal is financeable and marketable to institutional investors.

Participants will navigate volatile credit markets, negotiate covenants, and manage the syndication process, and compete against other banks for the mandate.

Leveraged Finance Simulation Concepts

Participants work through realistic scenarios, which can be customized to emphasize or exclude specific topics depending on the learning goals. This modular structure allows the simulation to be tailored to any type of session. Key concepts include:

Capital Structure Optimization
Leveraged Buyout Modeling
Debt Capacity Analysis
Senior Secured Loans
High-Yield Bonds
Mezzanine Financing and PIK Instruments
Debt Covenants and Credit Agreements
Credit Ratings and Spreads
Loan Syndication and Distribution
Fee Structuring and Economics
Market Timing and Investor Appetite
Risk Assessment and Mitigation

Gameflow

What Participants Do

In the simulation, participants will:

Assess the target company's cash flows, debt capacity, and ability to service debt.
Determine the right mix of senior loans, high-yield bonds, and subordinated debt.
Set appropriate interest rates and yields based on credit risk and market conditions.
Draft and negotiate financial maintenance and incurrence covenants with the sponsor.
Develop a book-building strategy, interact with virtual investors, and allocate the debt.
Present your financing proposal to the private equity sponsor (simulated by the instructor).
React to dynamic market events that impact investor demand and pricing.
Review the final syndication results, fees earned, and the performance of the capital structure.

Learning Objectives

By the end of the simulation, participants will be able to:

Analyze a company's financial profile to determine its optimal debt capacity for an LBO.
Design a multi-layered leveraged finance structure that balances risk and return.
Evaluate the impact of different debt instruments (loans, bonds, mezzanine) on a company's cost of capital and financial flexibility.
Interpret key debt covenants and understand their role in protecting lenders.
Execute a syndication strategy in a dynamic market, adjusting pricing and allocation to ensure a successful deal.
Articulate the economic trade-offs in a leveraged finance transaction to both clients and internal stakeholders.

How the Leveraged Finance Simulation Works

This simulation can be run individually or in teams in academic or corporate contexts. Each cycle represents a stage of getting through a pressing financial situation.

1. Team Formation and Role Assignment Participants are divided into teams, each representing a competing investment bank. Roles such as Deal Captain, Syndicate Manager, and Structuring Analyst may be assigned.

2. Deal Kick-off and Initial Analysis Teams receive a confidential information memorandum detailing the LBO target, the sponsor's equity contribution, and financial projections.

3. Structuring and Pricing Phase Using the simulation's financial engine, teams build their capital structure, select debt instruments, set initial price talk, and draft term sheets.

4. Sponsor Negotiation and Mandate Award Teams present their proposals to the private equity sponsor. The most compelling structure and terms may be awarded a "lead mandate".

5. Syndication Phase Teams enter the virtual market to sell their debt to institutional investors. They must adjust pricing based on real-time feedback and demand.

6. Market Dynamics and Closing Random economic events and competitor actions force teams to adapt their strategy. The simulation concludes when the debt is fully allocated or the deal is pulled.

Frequently Asked Questions

What are the technical prerequisites? A strong understanding of accounting, corporate finance, and financial modeling is recommended. No specific software coding knowledge is required as the simulation runs on a proprietary web-based platform.
How long does the simulation take to complete? The core simulation can be run in a 4-8 hour session. For university courses, it can be extended over multiple weeks with preparatory readings and a detailed wrap-up report.
Do we need to build an LBO model from scratch? No. The simulation provides a core LBO model and financial projections. Your focus is on structuring the debt that funds the LBO, not the equity component.
How realistic is the market environment? The simulation features a dynamic market engine with virtual investors who have different risk appetites. Market conditions can change, mirroring real-world volatility and its impact on debt issuance.
Is this a competition? Yes, teams compete for the financing mandate and for the most successful syndication, measured by metrics like fees earned, speed of distribution, and the final pricing achieved.
Can this simulation be customized for a corporate training program? Absolutely. We can tailor the case study, company profile, and market scenarios to align with your institution's specific training goals, such as focusing on specific industries or debt instruments.
What makes this simulation different from a traditional case study? Unlike a static case study, this simulation is dynamic and interactive. Your decisions have consequences, you must react to competitors and market events, and you experience the entire deal process in a compressed, risk-free environment.

Assessment

Assessment of participant performance can be tailored according to the host institution’s objectives (business school, corporate training, assessment centre). Typical assessment criteria include:

Final Syndication Results
Capital Structure Memo
Sponsor Presentation and Negotiation
Simulation Performance
Strategic Review Report
Peer Evaluation

Assessment may incorporate peer and self-review components, facilitator scoring, and debrief discussion. Results may feed into grades, executive feedback, certification or development plans.