Variant of What Makes a Good LBO Target? — Real Interview Variant — MILES Mobility (Car-Sharing)
LBO
“In a real interview, you're asked: "Would MILES — the German kilometer-based car-sharing service — be a good investment?" Walk me through your assessment, purely qualitatively, without needing any specific financial figures.”
As a credit analyst, you are asked to identify a company's off-balance-sheet financing arrangements — such as special purpose vehicles (SPVs) and synthetic leases — and reclassify them onto the balance sheet to reveal the company's true leverage.
Task: compute the company's reported Debt/EBITDA ratio, then reclassify two off-balance-sheet arrangements (an SPV and a synthetic lease) onto the balance sheet to compute the company's true, adjusted leverage — explaining why each arrangement actually qualifies for reclassification, not just plugging numbers into a formula.
The company's reported financial statements and two disclosed (but unconsolidated) financing arrangements are as follows.
| Line Item | Value |
|---|---|
| Reported Total Debt (on balance sheet) | $300m |
| Reported EBITDA | $100m |
| SPV Debt (financing a receivables securitization, off-balance-sheet) | $200m |
| Company retains first-loss risk on the SPV's receivables? | Yes |
| Company has power to direct the SPV's key decisions (servicing, collections)? | Yes |
| Synthetic Lease — PV of remaining lease payments | $50m |
| Synthetic lease includes a bargain purchase option at lease-end? | Yes (below expected fair market value) |
A Special Purpose Vehicle (SPV, also called a Special Purpose Entity or Variable Interest Entity/VIE) is a separate legal entity a company sets up to isolate specific assets and liabilities — often to raise financing without that debt showing up on the sponsoring company's own balance sheet. Whether the SPV's debt has to be added back depends on a control-and-risk test, not on who legally owns the SPV's equity.
Consolidate the SPV if: Company has the power to direct the SPV's most significant activities AND Company absorbs the majority of the SPV's losses or benefits (the "primary beneficiary" test under VIE / ASC 810 rules)
Using this test, determine whether the SPV's $200m of debt belongs on the company's balance sheet, and if so, add it to Reported Debt.
A synthetic lease is a lease structured so that, for accounting purposes, it qualifies as an operating lease (keeping the leased asset and its associated financing off the balance sheet), while for tax purposes the lessee is treated as the owner (allowing it to claim depreciation deductions). Whether it is really a financing arrangement in economic substance depends on who bears the risks and rewards of ownership.
Adjusted Debt = Reported Debt + SPV Debt (if consolidated) + PV of Synthetic Lease Payments (if the lease transfers substantially all risks and rewards of ownership, e.g. via a bargain purchase option)
Using this formula, compute the company's fully adjusted debt figure.
Debt/EBITDA = Total Debt / EBITDA
Assume:
Using these inputs, compute both the reported and the adjusted Debt/EBITDA ratios and compare them.
Try answering out loud first — then reveal the model answer and compare.
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