Project Uplands — Dividend Recapitalization
A 1.5-hour Leveraged Finance / Dividend Recap case study with a complete model answer
Modeled After
Deutsche Bank
Financing and process module pairing alternative execution paths with pro-forma capitalization and summary financials stamped to a single per-share and contribution assumption on every page
Structure and exhibit set are modeled after Deutsche Bank. The company, the financials and every figure in this case are entirely our own.
The Situation
Uplands Pet Care Group, Inc.
Uplands Pet Care Group
- Sector
- Veterinary services — general practice hospitals plus specialty and emergency referral centers, with central procurement and laboratory services
- Size
- Geography
- United States; eighteen states, no international operations
- Ownership
- Situation
The Prompt
You are staffed on a Leveraged Finance / Dividend Recap engagement for Uplands Pet Care Group. You have 90 minutes to work through the materials and produce an answer deck and an Excel model.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 90 minutes.
PART 1
Where the sponsor stands today
PART 2
What the documents permit — the restricted payment baskets
PART 3
What the documents permit — the incurrence test
PART 4
Both routes, sourced and used
PART 5
The three-year run, for each course of action
PART 6
Section 163(j) and the covenant package
PART 7
Screen the recapitalization comparables yourself
PART 8
Sponsor returns, on two measures that need not agree
PART 9
Size the distribution, and recommend one
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck and Excel model are in the solution set below.
- 01
Read the sweep grid before you read anything else
- 02
Build both constraints in full before you size anything
- 03
Price the increment and the refinancing as different animals
- 04
Make the operating plan pay for itself
- 05
Cap the revolver and say what will not fit
- 06
Run two return measures and expect them to disagree
- 07
Write the recommendation as a constraint, not a preference
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Dividend recapitalization
A financing in which a company raises debt and distributes the proceeds to its equity holders, with no change in ownership. Nobody buys, nobody sells and no premium is paid. What the sponsor receives is cash today; what it gives up is a share of what the company would otherwise have compounded into, plus interest on the debt that funded the distribution. The whole discipline of the archetype is holding those two halves in view at once.
Restricted payments and the basket build
The restricted payments covenant governs what a borrower may pay to its equity. Capacity is not one number: it is a general basket, usually the greater of a fixed floor and a percentage of Adjusted EBITDA and reduced by whatever has already been used; a builder basket that grows with cumulative net income off a starter amount and is often conditioned on a leverage test; an available amount fed by retained excess cash flow and reduced by what that cash has already been spent on; and an unlimited basket that opens only below a low leverage level. Each has to be built and each has to be checked.
Incurrence capacity against restricted payment capacity
Two different covenants answering two different questions. Incurrence governs how much debt may be raised, usually a free-and-clear amount plus whatever keeps a stated leverage ratio intact. Restricted payments govern how much may be distributed. A borrower can have ample room to borrow and very little room to pay out, and the smaller of the two is what actually governs a distribution. Reading only the leverage test is the most common way to get a recapitalization question wrong.
The excess cash flow sweep grid
A schedule that sets the share of excess cash flow a borrower must use to prepay its term loan, stepping down as leverage falls and often reaching zero. It is read top down against a pro forma ratio, which makes it a step rather than a slope: crossing a level turns the sweep back on in full. For a business funding acquisitions out of retained cash flow, a step-down that is lost costs the growth plan its funding source.
Most favored nation protection
A clause requiring that if an incremental facility prices more than a stated margin wide of the existing loan, the existing loan's spread is lifted to within that margin, usually for a limited period. It exists to stop a borrower from subordinating its existing lenders on price. It also means the cost of an incremental is not confined to the incremental: pricing one basis point too wide can reprice the entire outstanding balance, which is a number worth computing even when the clause does not bite.
A springing maintenance covenant
A financial test that applies only once a condition is met, most often revolver utilization above a threshold. A covenant-lite credit that never draws its revolver never tests it. A credit that has to draw its revolver to fund its own business plan does test it — quarterly, with a certificate — which means a structure can convert a covenant-lite loan into a covenanted one without a single word of the documents changing.
Section 163(j) and the effective tax shield
The deduction for business interest is limited to business interest income plus a percentage of adjusted taxable income, computed on an EBITDA basis for tax years beginning after 2024. A borrower already at the limit deducts nothing further, so incremental interest buys a shield far below the statutory rate — sometimes a fraction of it. A model that tax-effects interest at a flat rate cannot show this, and will overstate the after-tax attractiveness of every additional turn of leverage.
Money multiple against internal rate of return
The multiple measures how much a sponsor receives per dollar invested; the rate of return measures how quickly. Anything that pulls cash forward — a distribution, an early exit — raises the rate and, once interest and fees are paid for it, lowers the multiple. The two measures can therefore rank a set of alternatives in opposite orders, and when they do, neither is wrong: they are answering different questions, and the choice between them is a fund-level judgment about liquidity rather than an analytical one.
Screening a financing comparables set
A raw extract of recent financings is not a comparable set. Domicile, transaction type, loan format, size band and the size of the distribution all have to be applied before a median means anything. For a recapitalization there is a second decision on top: whether to read the set on the LEVEL of leverage each issuer reached or on the TURNS it added to get there. Starting points differ across issuers, so the two readings can place the same transaction very differently, and choosing between them is a judgment rather than a default.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Incremental leverage capacity
- —Restricted payment basket construction
- —Pro-forma credit statistics and rating impact
- —Sponsor IRR uplift from a recap
- —Recap versus sale versus hold comparison
- —Pricing and market flex
Answer Deck
Full model answer, banker-formatted
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Uplands — Dividend Recapitalization
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a dividend recapitalization case in an investment banking interview?
A timed exercise in which a sponsor wants cash out of a portfolio company it intends to keep, and you are asked how much the documents permit, what the credit profile looks like afterwards, and whether the transaction is worth doing. There is no change of control and no valuation. You build the restricted payment capacity and the incremental debt capacity, price the financing, run the pro forma credit statistics, screen a set of recent recapitalizations, and compare the sponsor's returns against selling and against holding. It is a leveraged finance staple because it grades documentary reading alongside modeling, which most case formats never touch.
Why is there no valuation in this case?
Because nothing is being bought or sold. The sponsor already owns the asset and intends to keep it, so there is no price to opine on, no premium to justify and no counterparty to be fair to. There are no comparable companies struck on trading multiples, no precedent transactions, no discounted cash flow, no cost of capital and no football field anywhere in the deliverable. The comparable set in this case is a financing benchmark — what recent recapitalizations actually cleared at — and it is not a valuation benchmark.
Which covenant actually limits a dividend recapitalization?
Usually the restricted payments covenant rather than the leverage test, and noticing that is most of the exercise. Incurrence governs how much debt may be raised; restricted payments govern how much may be distributed. The second is built from separate baskets — a general basket net of what has been used, a builder basket that grows with cumulative net income and often carries its own leverage condition, an available amount fed by retained cash flow and reduced by what it has already funded — and it can permit a small fraction of what the borrower is free to borrow. The smaller of the two governs, and it has to be built rather than assumed.
Does a dividend recapitalization create value for the sponsor?
No, and a case answer written as though it does has missed the exercise. It moves value forward in time and pays interest for the privilege. The internal rate of return typically rises, because cash arrives years earlier; the money multiple typically falls, because the company pays interest and fees on debt it did not previously carry and arrives at exit with more of it. Charge the transaction with anything the business can no longer fund out of its own cash flow — an acquisition program, most often — and the apparent advantage can disappear entirely. The legitimate reason to do one is that a fund needs distributions now, and that is a liquidity judgment rather than a value one.
How should the comparables set be read for a recapitalization?
On the turns added as well as the level reached. Issuers start from different places, so a transaction that lands at the median level of pro forma leverage may still have taken more turns in one move than almost anything in the set — and a syndicate desk prices the step as well as the level. Screening matters for a second reason too: it often barely moves the median while moving the outer bound by close to a full turn, and which of those two statistics a financing is tested against is a decision the candidate has to make and defend.
What separates a strong candidate from an adequate one here?
Both will size a facility and both will compute leverage. The difference shows in five places: building the restricted payment baskets line by line instead of sizing off the leverage test; reading the excess cash flow sweep grid as a step and noticing what crossing it costs the business plan; carrying the acquisition spend as a cash use so the plan has to be paid for; modeling the interest deduction limit explicitly rather than applying a flat tax rate; and putting both return measures on the page, letting them disagree, and then writing down that a fundable transaction should still not be done.
About This Leveraged Finance / Dividend Recap Case Study
Leveraged Finance / Dividend Recap case study for investment banking interviews. 90-minute format covering incremental leverage capacity, restricted payment basket construction, pro-forma credit statistics and rating impact. Includes the full prompt, a model answer deck, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Leveraged Finance. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
90-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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