Leveraged Finance Interview Questions (LevFin)

Free sample from the Deskcraft question bank

Leveraged finance sits between banking and credit: debt tranches, leveraged loans, high-yield bonds, credit ratios and how an LBO is financed. Real questions from the Deskcraft bank, with model answers.

1. Walk me through the typical LBO debt tranches from senior to junior.

Model answer

A revolver and senior secured term loans (Term Loan A and B) come first, being the cheapest and secured. Then senior or subordinated high-yield notes, then mezzanine or PIK debt, then sponsor equity at the bottom. Higher tranches are cheaper and paid first in bankruptcy; lower tranches carry higher rates for more risk.

2. What are the key leverage and coverage ratios in credit analysis?

Model answer

Leverage ratios include Debt/EBITDA and net Debt/EBITDA and Debt/Capital; coverage ratios include EBITDA/interest, (EBITDA minus capex)/interest, and fixed-charge coverage. Free cash flow to debt is also used. Together they measure how much debt a company carries relative to earnings and its ability to service it.

3. What does a leveraged finance group do?

Model answer

It structures and underwrites the debt, term loans and high-yield bonds, used to fund LBOs, acquisitions and recapitalizations for below-investment-grade companies. It bridges sponsors and corporates with debt investors, sizing leverage, setting terms and covenants, and committing the bank's balance sheet to underwrite the financing.

4. Paper LBO: buy at 10x EBITDA of 100, funded 60% debt, exit in 5 years at 10x with EBITDA at 150 and half the debt repaid. Rough IRR?

Model answer

Entry EV is 1000, so debt is 600 and equity 400. Exit EV is 150 times 10, or 1500; debt is now 300, so exit equity is 1200. MOIC is 1200 over 400, which is 3.0x over five years, roughly a 25% IRR (3x over 5 years is about 24-25%).