Quite rudimentary but can someone help understand how optimum leverage (as a % of total capital requirement) is calculated for a transaction?

For instance, if I were to acquire a solar power plant that currently has 70% debt in its capital structure, how would I go about structuring this buyout? Would I only refinance the existing 70% debt? Can I introduce more debt? Would lenders agree to introducing more leverage to the project?

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As a rule of thumb, more debt is always good for the buyer if the business can service it through cash flow.

Imagine the edge case of a deal with 99.999% (etc.) debt funding, and a dollar of equity invested. The buyer only has a dollar at risk - if they make literally any returns it’s all upside

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Note that this is broadly speaking impossible in practice.

In a cash flow loan, no lender is going to go below ~30% (+/-) equity.

You could maybe do it if you did an ABL on a business with a big b/s and at a trough in performance, but it’s a stretch to find a realistic scenario where you could get something done with a dollar of equity

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Can its cash flows support that much debt? Have there been comps that have been levered higher, and if so at what pricing? Is that incremental debt worth it based off target equity returns?

Lenders have min DSCR and max gearing requirements. You will run a project finance model to size and sculpt your debt to the project cash flows based on those requirements from the lenders. You could theoretically refinance to increase the leverage if your cash flows allow for it, but typically the capital stack is already pretty optimized for renewables projects

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