Interview prep · Leveraged Finance
Leveraged Finance interview questions
Leveraged finance interviews test a mental flip most candidates have not made yet: from the equity holder's upside to the lender's downside. A credit interviewer does not ask how good a business can get — they ask how bad it can get and still pay them back.
The foundation questions cover debt versus equity, why companies lever up, and the basic geography of a leveraged capital structure — secured versus unsecured, senior versus subordinated, loans versus bonds. The middle tier adds the lender's toolkit: maintenance versus incurrence covenants, the credit statistics that frame every discussion — leverage as debt to EBITDA, coverage as EBITDA to interest — and what makes cash flows debt-friendly. Superday questions become applied: how much debt a given business could support and why, how you would structure a financing for a specific situation, and how the credit story of a company differs from its equity story.
Strong candidates lead with downside protection — stability of cash flows, asset coverage, room under the structure — and treat upside as the lender's afterthought. Demonstrating that instinct matters more than any single definition.
Leveraged Finance: what candidates ask
How is levfin interview prep different from standard M&A prep?+
The foundation is identical — accounting, valuation, and LBO mechanics all still get tested — but levfin adds a credit layer on top: capital structure seniority, covenants, credit ratios, and reasoning about debt capacity. Candidates who prep only the standard set can pass the first half of a levfin interview and stall in the second.
Do I need to know current yields and spreads?+
Exact levels are not the test, and any number you memorize dates quickly. What interviewers commonly probe is the machinery: why riskier tranches price wider, what moves spreads, and how market conditions affect what deals can get financed. Rough directional awareness of the rate environment, explained through drivers, beats precise but stale figures.
What credit ratios should I know for a levfin interview?+
The core pair is leverage — total or net debt to EBITDA — and interest coverage, EBITDA (or EBITDA less capex) to interest expense. Know what each measures, why lenders care, and how they move with the business. Avoid quoting hard 'normal' levels as facts: acceptable ratios vary by sector, structure, and market conditions, and interviewers know it.
Every Leveraged Finance question in the bank
All 81 published questions from Leveraged Finance & Credit — each links to its own page. Free ones show the full model answer.
5
- Rank a standard LBO capital structure from cheapest to most expensive cost of capital, and explain why the ordering holds.
- What is the core difference between a maintenance covenant and an incurrence covenant?
- Which instruments typically carry maintenance covenants and which carry only incurrence covenants?
- What does 'covenant-lite' (cov-lite) actually mean?
- What is a 'basket' in a credit agreement or indenture?
38
- A sponsor buys a company at 6.0x EBITDA of $200mm ($1.2bn EV). They want 4.0x total leverage. Sketch a plausible debt stack by tranche and the equity check.
- Why would a deal include both a TLB and senior notes rather than just maxing out the term loan?
- What does 'pro-rata' vs. 'institutional' tranche mean in a leveraged loan package?
- Explain the typical amortization profile of a TLB and what a '1% amort with bullet' means for the lender.
- If a $100mm note PIKs at 10% for 3 years then is repaid, what is the balance at repayment, and how does this affect leverage versus cash-pay debt?
- What is mezzanine debt's 'equity kicker,' and why do mezz lenders demand it?
- Rank these by expected recovery in a default and justify: first-lien TLB, second-lien loan, senior unsecured notes, subordinated mezz.
- What is 'covenant-lite,' and which tranche in a typical structure still keeps a maintenance covenant?
- What is preferred equity's role in an LBO capital structure, and how is it different from PIK debt?
- A company has a $75mm revolver (undrawn), $500mm first-lien TLB, $150mm second lien, $250mm senior notes, and $50mm cash, on $200mm EBITDA. Compute first-lien, secured, total, and net leverage.
- How does adding a tranche of mezzanine or second-lien debt affect a sponsor's equity IRR versus funding the same dollars with equity?
- Order the maturities you'd expect across a revolver, TLA, TLB, and senior notes, and explain why this 'maturity ladder' matters.
- Why do borrowers and sponsors prefer cov-lite structures, and what do lenders give up?
- What is a 'springing' financial covenant, and why is it common on a cov-lite TLB deal?
- Give examples of common maintenance financial covenants and how each is defined.
- What is the most common incurrence covenant test for incurring new debt, and how does the borrower clear it?
- Distinguish a 'fixed' (hard-dollar) basket from a 'grower' basket.
- What is a restricted payments (RP) covenant and what does it govern?
- What is the debt incurrence covenant trying to prevent, and what are its main permitted channels?
- What is a 'covenant step-down' and why do sponsors include one?
- What is 'covenant headroom' or 'cushion', and how do you calculate it?
- What is the difference between a 'technical default' and a payment default, in covenant terms?
- Walk me through what happens when a borrower with a maintenance covenant breaches it.
- How do covenant packages differ between high-yield bonds and leveraged loans?
- Why does a high-yield bond typically use an incurrence covenant package while bank lenders historically wanted maintenance covenants?
- If a credit is cov-lite, how do lenders still get any early protection or control before a payment default?
- Walk me through a typical leveraged buyout debt capital structure from top to bottom.
- What is the difference between Term Loan A and Term Loan B?
- What are the main differences between bank debt (leveraged loans) and high-yield bonds?
- Explain secured vs. unsecured debt and why it matters for recovery.
- What is the difference between coupon, spread, and yield on a debt instrument?
- What does 'SOFR + 400' mean and how does a floating-rate loan price?
- What is mezzanine debt and where does it sit?
- Define total leverage, net leverage, and a 'turn' of leverage.
- Why do credit investors look at EBITDA − capex rather than just EBITDA?
- Why might a sponsor choose to use MORE leverage vs. LESS in an LBO?
- What is the difference between investment grade (IG) and high yield (HY)?
- What role do the rating agencies play in a LevFin deal?
38
- What is an excess cash flow (ECF) sweep, and how does the sweep percentage typically step down?
- Why does a revolver usually rank pari passu with the first-lien term loan rather than being structurally senior?
- What is the difference between a cash-flow revolver and an ABL revolver?
- What is a delayed-draw term loan (DDTL) and when is it used?
- Define a 'unitranche' facility and explain the role of the Agreement Among Lenders (AAL).
- A first-out / last-out (FOLO) split: which piece prices wider and why?
- What is a second-lien term loan and how does its pricing and call protection differ from the first lien?
- Walk me through the difference between 'structural subordination' and 'contractual subordination.'
- What is HoldCo PIK debt and why is it structurally and contractually junior to OpCo debt?
- Contrast straight PIK notes with a PIK-toggle and explain the economics of the toggle option.
- Why might a sponsor prefer senior secured notes over an additional second-lien term loan, or vice versa?
- In a dividend recapitalization, which tranches typically get added, and what is the impact on the capital structure?
- What is an 'incremental facility' / accordion, and how do 'free-and-clear' and ratio-based capacity work?
- What is an MFN (most-favored-nation) provision on incremental debt, and what is 'MFN sunset'?
- Why do TLB lenders accept cov-lite terms — what protections do they still have?
- Explain how the same total interest expense can produce very different coverage depending on tranche mix (PIK vs. cash, floating vs. fixed).
- What is an intercreditor agreement and which conflicts between tranches does it govern?
- Why do rating agencies 'notch' instrument ratings up or down from the corporate family rating across tranches?
- On a springing revolver covenant, who can act on a breach — the revolver lenders or the term-loan lenders?
- What is the 'available amount' (or 'cumulative credit' / 'builder') basket?
- How does a sponsor get a dividend out of a portfolio company past the restricted payments covenant?
- What does it mean to 'stack' or use baskets in combination, and why do lenders care?
- What is EBITDA add-back risk in the context of covenants, and why does it matter so much?
- A TLB has a maximum first-lien net leverage covenant of 6.5x. The model shows $780mm first-lien debt, $30mm cash, $120mm EBITDA. Is the borrower in compliance, and what is the EBITDA cushion?
- What is an 'equity cure' right, and what are its typical limitations?
- What is a 'portability' provision and why do lenders dislike it?
- What is a 'J. Crew' trap-door, and which covenants does it exploit?
- What is an unrestricted subsidiary, and why is it central to covenant analysis?
- What is a 'ratio debt' basket versus a 'fixed' debt basket, and which is more lender-friendly?
- What is OID (original issue discount) and how does it affect yield?
- What is call protection, and how does it differ between high-yield bonds and term loans?
- What is a make-whole provision?
- What is PIK (payment-in-kind) debt and when is it used?
- What is interest coverage and how is it different from the fixed-charge coverage ratio (FCCR)?
- How are leverage levels for an LBO determined — what caps how much debt a deal can carry?
- Walk me through how a leveraged loan is underwritten and syndicated.
- What is a commitment letter and what is 'flex' language?
- What is a bridge loan in acquisition financing and why does it exist?
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