In This Article How Waterfall Priority Works Modeling the Debt Structure Python Implementation DSCR Interpretation Working Example: Manufacturing LBO When to Refinance vs. Repay How Waterfall Priority Works In a leveraged buyout, cash does not flow freely to equity until every obligation above it in the capital structure has been satisfied. That sequencing — senior debt first, mezzanine second, equity last — is what a waterfall model formalizes. Get the order wrong and you will either overstate free cash flow to equity or miss a covenant breach entirely. The mechanics are straightforward: operating cash flow enters the top of the waterfall. From there, it cascades through each tranche in strict priority order. What remains after each tranche's interest and required principal is the cash available to the next level. What exits the bottom is the true free cash flow available to equity holders — often a very different number than EBITDA minus interest expense suggests.…