Credit Deal Interview Drills
This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.
I am a final-year finance student at a US university interviewing for leveraged finance roles at an elite boutique. I want a credit-oriented deal interview with detailed follow-up questions. Can you run me through a realistic case and push me on capital structure tradeoffs, covenant packages, and lender return logic?
Absolutely. Let's make it feel like a real leveraged finance deal discussion.
Case: a sponsor is buying a lower middle market software company at 9.5x EBITDA. The business has 35 percent recurring revenue, modest churn, and stable margins, but growth has slowed. The sponsor wants to use 6.0x senior secured debt and 1.5x mezz, with the rest equity.
First question: walk me through how you would think about the capital structure. Why might the sponsor prefer more debt, and why might lenders push back?
The sponsor prefers more debt because it increases equity IRR through leverage and reduces equity check size. But lenders would push back because the company has only moderate growth and partially recurring revenue, so adding too much debt increases default risk if EBITDA stalls. I would want to balance the desire for higher returns with the need for cushion in a slower-growth business.
Good start. Now go deeper.
What specific metrics would you use to test whether 6.0x senior debt is too aggressive? And if the company is trading at 9.5x, what does that imply about lender recovery assumptions if the credit weakens?
I would look at leverage, interest coverage, free cash flow conversion, and downside EBITDA sensitivity. I would also test whether the company can still service debt if EBITDA falls 10 to 20 percent.
If the business is acquired at 9.5x and senior debt is 6.0x, the lenders are getting in with a decent cushion only if enterprise value holds up. If EBITDA weakens, recovery depends on how much value the assets and cash flow retain. Because software tends to be asset light, recoveries may rely more on enterprise value than hard collateral, so lenders would care a lot about cash flow resilience and covenants.
That is directionally right, but I want more precision.
Suppose EBITDA is 100 million. The capital structure is 600 million senior secured, 150 million mezzanine, and 200 million equity. If EBITDA drops 15 percent, what happens to leverage, and what does that say about lender behavior? Also, name the covenant package you would expect in a leveraged finance deal like this.
If EBITDA falls from 100 million to 85 million, senior leverage rises from 6.0x to about 7.1x, and total debt leverage rises from 7.5x to about 8.8x. That would make lenders more defensive because the borrower is closer to a distress scenario and less able to absorb further deterioration.
I would expect a maintenance covenant package for the revolver, especially a total net leverage test, plus incurrence covenants for additional debt, liens, restricted payments, and acquisitions. For a term loan, there may be limited maintenance covenants, but tighter baskets and builder basket language would still matter. Lenders would also want limits on EBITDA add-backs and flexibility for restricted payments only if performance stays strong.
Better. Now let us separate a strong candidate from a decent one.
Explain why a lender would still support this deal even if the company is not a perfect growth story. What is the lender return logic here? Walk me through spread income, fees, call protection, and what needs to be true for the lender to win.
A lender can still support the deal because the return is not based on equity-like growth, but on contractual cash yield and downside protection. The lender earns spread income on a large principal balance, upfront fees, and possibly call protection or prepayment premiums if the deal refinances early.
The lender wins if the borrower performs close to plan, so the debt amortizes or refinances before credit quality weakens, and if the loan price stays near par. Even if upside is limited, the lender can still generate an attractive risk-adjusted return if leverage is reasonable, documentation is tight, and the sponsor injects enough equity to protect the downside.
Strong. Final follow-up.
If the sponsor insisted on looser covenants and a dividend recap in year 2, how would you react as a lender? Give me the tradeoff between flexibility and protection, and tell me what compensating terms you would ask for.