HarborTech Services (HTS) – LBO Underwriting Analysis

---

SECTION 0: ENTRY CAPITALIZATION

Enterprise Value at Entry:

EV = 12.0x × $120m = $1,440m

Transaction Fees:

2.0% × $1,440m = $28.8m (funded by equity)

Debt at Close:

Tranche	Multiple	Amount
Term Loan	4.0x × $120m	$480m
Mezzanine	1.5x × $120m	$180m
Total Debt	5.5x	$660m

Equity Check:

EV + Fees − Debt = $1,440m + $28.8m − $660m = $808.8m

---

SECTION 1: YEAR-BY-YEAR OPERATING MODEL

Revenue & EBITDA Build

	FY2025	FY2026	FY2027	FY2028	FY2029	FY2030
Growth %	—	8%	7%	6%	5%	5%
Revenue ($m)	900.0	972.0	1,040.0	1,102.5	1,157.6	1,215.5
EBITDA Margin	13.3%	14.0%	15.0%	16.0%	16.5%	17.0%
EBITDA ($m)	120.0	136.1	156.0	176.4	191.0	206.6

Revenue calculations:

• FY2026: 900.0 × 1.08 = 972.0
• FY2027: 972.0 × 1.07 = 1,040.0 (rounded; precise = 1,040.04)
• FY2028: 1,040.04 × 1.06 = 1,102.4
• FY2029: 1,102.4 × 1.05 = 1,157.6
• FY2030: 1,157.6 × 1.05 = 1,215.4

I'll carry precise figures through the model; table shows rounded.

---

Debt Schedule

Key mechanics:

• Term Loan: 1% annual amortization on original principal ($480m × 1% = $4.8m/yr mandatory); excess FCF sweeps optionally
• Mezzanine: PIK accrues to principal; no cash amortization until exit
• Cash interest = rate × beginning-of-year balance

Mezzanine PIK Accrual (no optional paydown):

	BOP Balance	Cash Int (12%)	PIK (2%)	EOP Balance
FY2026	180.0	21.6	3.6	183.6
FY2027	183.6	22.0	3.7	187.3
FY2028	187.3	22.5	3.7	191.0
FY2029	191.0	22.9	3.8	194.8
FY2030	194.8	23.4	3.9	198.7

PIK = 2% × BOP balance; EOP = BOP + PIK (cash interest paid, not added)

---

Full FCF Waterfall (FY2026–FY2030)

I'll work through each year sequentially because Term Loan balance (and thus interest) changes with optional paydowns.

---

FY2026:

Line Item	Calculation	$m
Revenue		972.0
EBITDA	14.0% × 972.0	136.1
TL Cash Interest	9.0% × 480.0	(43.2)
Mezz Cash Interest	12.0% × 180.0	(21.6)
Total Cash Interest		(64.8)
Pre-tax income (simplified)	136.1 − 64.8	71.3
Cash Taxes	25% × 71.3	(17.8)
Capex	3.0% × 972.0	(29.2)
ΔNWC	0.5% × (972.0−900.0)	(0.4)
FCF before mandatory amort		59.9
Mandatory TL Amort	1% × 480.0	(4.8)
FCF available for optional paydown		55.1
Optional TL Paydown		(55.1)
Net FCF		0

Ending Balances FY2026:

• Term Loan: 480.0 − 4.8 − 55.1 = 420.1
• Mezzanine: 183.6
• Total Debt: 603.7

---

FY2027:

Line Item	Calculation	$m
Revenue	972.0 × 1.07	1,040.0
EBITDA	15.0% × 1,040.0	156.0
TL Cash Interest	9.0% × 420.1	(37.8)
Mezz Cash Interest	12.0% × 183.6	(22.0)
Total Cash Interest		(59.8)
Pre-tax income	156.0 − 59.8	96.2
Cash Taxes	25% × 96.2	(24.1)
Capex	3.0% × 1,040.0	(31.2)
ΔNWC	0.5% × (1,040.0−972.0)	(0.3)
FCF before mandatory amort		86.6
Mandatory TL Amort	1% × 480.0	(4.8)
FCF for optional paydown		81.8
Optional TL Paydown		(81.8)

Ending Balances FY2027:

• Term Loan: 420.1 − 4.8 − 81.8 = 333.5
• Mezzanine: 187.3
• Total Debt: 520.8

---

FY2028:

Line Item	Calculation	$m
Revenue	1,040.0 × 1.06	1,102.4
EBITDA	16.0% × 1,102.4	176.4
TL Cash Interest	9.0% × 333.5	(30.0)
Mezz Cash Interest	12.0% × 187.3	(22.5)
Total Cash Interest		(52.5)
Pre-tax income	176.4 − 52.5	123.9
Cash Taxes	25% × 123.9	(31.0)
Capex	3.0% × 1,102.4	(33.1)
ΔNWC	0.5% × (1,102.4−1,040.0)	(0.3)
FCF before mandatory amort		105.5
Mandatory TL Amort	1% × 480.0	(4.8)
FCF for optional paydown		100.7
Optional TL Paydown	capped at TL balance	(100.7)

Check: TL balance entering FY2028 = 333.5; optional paydown of 100.7 → TL = 232.8 ✓ (positive, no cap needed)

Ending Balances FY2028:

• Term Loan: 333.5 − 4.8 − 100.7 = 228.0
• Mezzanine: 191.0
• Total Debt: 419.0

---

FY2029:

Line Item	Calculation	$m
Revenue	1,102.4 × 1.05	1,157.5
EBITDA	16.5% × 1,157.5	191.0
TL Cash Interest	9.0% × 228.0	(20.5)
Mezz Cash Interest	12.0% × 191.0	(22.9)
Total Cash Interest		(43.4)
Pre-tax income	191.0 − 43.4	147.6
Cash Taxes	25% × 147.6	(36.9)
Capex	3.0% × 1,157.5	(34.7)
ΔNWC	0.5% × (1,157.5−1,102.4)	(0.3)
FCF before mandatory amort		111.7
Mandatory TL Amort	1% × 480.0	(4.8)
FCF for optional paydown		106.9
Optional TL Paydown	capped at TL balance	(106.9)

Check: TL entering FY2029 = 228.0; paydown 106.9 → TL = 121.1 ✓

Ending Balances FY2029:

• Term Loan: 228.0 − 4.8 − 106.9 = 116.3
• Mezzanine: 194.8
• Total Debt: 311.1

---

FY2030:

Line Item	Calculation	$m
Revenue	1,157.5 × 1.05	1,215.4
EBITDA	17.0% × 1,215.4	206.6
TL Cash Interest	9.0% × 116.3	(10.5)
Mezz Cash Interest	12.0% × 194.8	(23.4)
Total Cash Interest		(33.9)
Pre-tax income	206.6 − 33.9	172.7
Cash Taxes	25% × 172.7	(43.2)
Capex	3.0% × 1,215.4	(36.5)
ΔNWC	0.5% × (1,215.4−1,157.5)	(0.3)
FCF before mandatory amort		122.7
Mandatory TL Amort	1% × 480.0	(4.8)
FCF for optional paydown		117.9
Optional TL Paydown	capped at TL balance (116.3)	(116.3)
Residual cash retained	117.9 − 116.3	1.6

TL is fully paid off during FY2030; $1.6m residual cash retained on balance sheet at exit.

Ending Balances FY2030:

• Term Loan: 0
• Mezzanine: 198.7 (repaid at exit)
• Total Debt: 198.7

---

Summary Table

($m)	FY2026	FY2027	FY2028	FY2029	FY2030
Revenue	972.0	1,040.0	1,102.4	1,157.5	1,215.4
EBITDA	136.1	156.0	176.4	191.0	206.6
EBITDA Margin	14.0%	15.0%	16.0%	16.5%	17.0%
TL Interest	(43.2)	(37.8)	(30.0)	(20.5)	(10.5)
Mezz Cash Interest	(21.6)	(22.0)	(22.5)	(22.9)	(23.4)
Cash Taxes	(17.8)	(24.1)	(31.0)	(36.9)	(43.2)
Capex	(29.2)	(31.2)	(33.1)	(34.7)	(36.5)
ΔNWC	(0.4)	(0.3)	(0.3)	(0.3)	(0.3)
FCF (pre-amort)	59.9	86.6	105.5	111.7	122.7
Mandatory Amort	(4.8)	(4.8)	(4.8)	(4.8)	(4.8)
Optional Paydown	(55.1)	(81.8)	(100.7)	(106.9)	(116.3)
Residual Cash	0	0	0	0	1.6
TL Balance (EOP)	420.1	333.5	228.0	116.3	0
Mezz Balance (EOP)	183.6	187.3	191.0	194.8	198.7
Total Debt (EOP)	603.7	520.8	419.0	311.1	198.7

---

SECTION 2: EXIT & RETURNS

Exit Proceeds

Exit Enterprise Value:

EV = 10.5x × $206.6m = $2,169.3m

Exit Fees:

1.0% × $2,169.3m = $21.7m

Net Proceeds to Equity:

Item	$m
Exit EV	2,169.3
Less: Exit Fees	(21.7)
Less: Mezz Repayment (incl. PIK)	(198.7)
Less: Term Loan Repayment	(0)
Plus: Residual Cash	1.6
Equity Proceeds	1,950.5

MOIC

MOIC = Equity Proceeds / Equity Invested = $1,950.5m / $808.8m = 2.41x

IRR (5-year)

Using: IRR = (MOIC)^(1/n) − 1

IRR = (2.41)^(0.20) − 1

(2.41)^(0.20): ln(2.41) = 0.8796; 0.8796 × 0.20 = 0.1759; e^0.1759 = 1.1923

Equity IRR ≈ 19.2%

---

SECTION 3: SENSITIVITY TABLE — EQUITY IRR

Methodology

For each scenario, I recalculate FY2030 EBITDA using the sensitivity margin (holding revenue constant at $1,215.4m), compute exit EV, then derive equity proceeds and IRR. Debt at exit is held constant at base case ($198.7m Mezz + $0 TL + $1.6m cash) since operating cash flows change modestly with margin — for a clean sensitivity I hold debt paydown schedule constant and only vary exit valuation and EBITDA.

FY2030 EBITDA by margin scenario:

• 16%: $1,215.4m × 16% = $194.5m
• 17%: $1,215.4m × 17% = $206.6m ← base
• 18%: $1,215.4m × 18% = $218.8m

Exit EV, Net Equity Proceeds, MOIC, IRR:

Formula: Net Equity = EV×(1−1%) − 198.7 + 1.6; IRR = (Net Equity / 808.8)^0.2 − 1

	9.5x Exit	10.5x Exit	11.5x Exit
16% Margin
Exit EV	$1,847.8m	$2,042.8m	$2,237.3m
Net Equity	$1,630.1m	$1,823.2m	$2,015.9m
MOIC	2.01x	2.25x	2.49x
IRR	15.0%	17.6%	20.0%
17% Margin (Base)
Exit EV	$1,962.7m	$2,169.3m	$2,375.9m
Net Equity	$1,743.1m	$1,950.5m	$2,157.4m
MOIC	2.15x	2.41x	2.67x
IRR	16.5%	19.2%	21.7%
18% Margin
Exit EV	$2,077.6m	$2,295.9m	$2,514.2m
Net Equity	$1,856.1m	$2,073.0m	$2,289.4m
MOIC	2.29x	2.56x	2.83x
IRR	18.0%	20.7%	23.1%

IRR calculations use (MOIC)^(1/5) − 1. Exit fees = 1% of EV deducted.

Key Takeaway: The base case clears a 2.0x / 15% IRR hurdle in all but the worst scenario (9.5x / 16% margin = 15.0% IRR / 2.01x). The investment is most sensitive to exit multiple — a 1.0x turn swing moves IRR ~2.2 points, while a 1% margin swing moves IRR ~1.5 points.

---

SECTION 4: UNDERWRITING RISKS

5 Key Risks

1. Customer Concentration / Contract Non-Renewal HTS serves data centers under recurring contracts. If hyperscaler clients (likely top 3–5 = >40% revenue) in-source HVAC maintenance or switch vendors at renewal, revenue could cliff. The recurring revenue story is the core underwriting thesis — any disruption is existential to returns.

2. Labor Cost Inflation & Technician Scarcity HVAC maintenance is labor-intensive (field technicians). Wage inflation, union activity, or a structural shortage of certified technicians (HVAC + data center clearance) could compress margins significantly, directly threatening the 14%→17% margin expansion thesis (~370bps over 5 years).

3. Interest Rate / Refinancing Risk The deal is levered 5.5x at close with 9% TL / 14% all-in Mezz cost. While the FCF sweep deleverages aggressively, a credit market dislocation at exit could force a sale at depressed multiples or impair refinancing. The Mezz PIK accrual ($18.7m over 5 years) also quietly increases exit debt obligations.

4. Technology Disruption / Predictive Maintenance Displacement IoT-enabled remote monitoring and AI-driven predictive maintenance platforms could allow data centers to reduce on-site service frequency or shift to lower-cost providers. HTS's monitoring business could be commoditized, compressing both revenue growth and margins.

5. Data Center End-Market Cyclicality / Capex Freeze Data center construction and expansion drives new contract wins. A hyperscaler capex pullback (as seen periodically), cloud consolidation, or macro-driven IT spending freeze could reduce new contract flow, limiting the 5–8% revenue growth assumptions and the ability to cross-sell monitoring services.

---

SECTION 5: DOWNSIDE PROTECTION LEVERS

5 Concrete Mechanisms

1. Covenant Package with Springing Cash Sweep Negotiate a net leverage maintenance covenant (e.g., <5.0x) with a springing cash sweep that accelerates Term Loan paydown if leverage exceeds threshold. This protects against EBITDA deterioration by forcing deleveraging before the situation becomes distressed — the model already shows $340m of optional TL paydown over 5 years.

2. Contracted Revenue Lock-In (Multi-Year MSAs with Escalators) At close, prioritize renegotiating customer contracts to 3–5 year Master Service Agreements with CPI-linked price escalators (e.g., CPI + 1–2%). This converts lumpy renewal risk into a predictable revenue base and directly supports the margin expansion thesis by passing through labor cost inflation.

3. Mezz Conversion / PIK Toggle Option Negotiate a PIK toggle on the Mezzanine (ability to switch between cash pay and PIK) to preserve liquidity in a stress scenario. If EBITDA underperforms, toggling to full PIK saves $23–24m/year in cash interest, protecting the FCF sweep and avoiding a liquidity trap.

4. Operational Margin Levers: Route Density & Pricing Power Identify $15–20m of cost takeout through technician route optimization (geographic clustering of contracts) and procurement consolidation (parts/equipment buying power). This creates a "self-help" margin bridge that is partially independent of revenue growth, providing a floor against the margin expansion assumptions.

5. Strategic Buyer / Dual-Track Exit Optionality Given HTS's mission-critical positioning in the data center supply chain, identify 3–5 strategic acquirers (large facility management firms, HVAC OEMs with service ambitions, infrastructure-focused corporates) as exit alternatives to a sponsor-to-sponsor deal. Strategic buyers would likely pay 11–13x, providing a meaningful premium to the 10.5x base case and protecting against PE multiple compression at exit.

---

SUMMARY SCORECARD

Metric	Value
Entry EV	$1,440m
Entry Leverage	5.5x / $660m
Equity Invested	$808.8m
Exit EV (base)	$2,169.3m
Exit Debt	$198.7m
Equity Proceeds	$1,950.5m
MOIC	2.41x
IRR	~19.2%
Minimum IRR (stress)	~15.0% (9.5x / 16% margin)
Maximum IRR (upside)	~23.1% (11.5x / 18% margin)

IC Recommendation (Base Case): The investment clears a 2.0x / 15% hurdle in all but the most stressed scenario. The thesis is predicated on (1) mission-critical contract stickiness, (2) labor/route efficiency driving margin expansion, and (3) data center secular tailwinds supporting growth. Primary risks are contract concentration and technician cost inflation. Recommend proceeding subject to confirmatory diligence on top-10 customer contract terms and workforce cost structure.