The amount of debt you can raise for an LBO is driven by the stability of the company’s cash flows, the asset base of the target company, the sectors and end markets the company is exposed to, market conditions, and the terms of the debt in the credit agreement (including covenants).
The stability of the company’s cash flows ensures that the company can pay interest and mandatory debt repayments as well as meet covenants. A strong asset base provides collateral for the debt. Exposure to stable and growing sectors increases the likelihood of lenders providing debt. Market conditions can influence how much risk lenders are willing to take.
The terms of the credit agreement – such as the interest expense, prepayment penalties, fees, and covenants – influence how much debt the PE firm will want to take on.