Melissa Bockhold Heather Coddington - Franklin College

large amount of confidence in Seagate’s current management. Second, by having
management invest alongside the private equity company, Silver Lake is ensuring an
alignment between management and shareholder interests. Typically in situations such as
this, the private equity firm will own between 70-90% of the common equity of the
bought-out company (Note). Thus, Silver Lake’s 89% ownership of common equity is
right on target.
The senior debt will be financed by large financial institutions such as commercial
banks. Debt provided from these institutions is typically comprised of two components:
a revolving credit facility and term debt. Senior debt carries seniority or preference over
the other types of debt used in a LBO. These lenders have the most senior claim against
the cash flows and assets of a business, so principle and interest payments to this group
take precedence over other types of debt (Note). In Seagate’s particular case, we feel that
approximately 50% of the company’s new capital structure should be composed of senior
debt.
Subordinate debt, or junior debt as it is sometimes called, is the middle section of
the capital structure, and it generally fills the gap between the senior debt and equity in a
transaction. This type of debt “can take the form of notes from the private placement
market or high-yield bonds from the public markets, depending on the size and
attractiveness of the deal” (Note). Since this type of debt has claim on a company’s cash
flows and assets only after the senior debt has been dealt with, junior lenders’ low
priority and high risk is compensated with higher interest rates. In Seagate’s case, we
feel that this type of debt should account for 5% of their total capital structure.
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