Private credit interview questions, downside first

The math overlaps. The question it answers does not.

1. The question

   Will we get paid back?

   A PE interviewer asks what the company could be worth in five years. A lender asks what happens to the loan if the plan misses. Lead with that.

2. The payoff

   Capped at interest and fees

   If the company triples, the loan still pays its coupon. If it fails, you can lose most of it. That lopsided bet is why credit people sound cautious.

3. The model

   Cash flow over exit value

   Equity returns lean on the exit multiple. A lender wants free cash flow after interest, tax and capex, year by year, and how fast debt comes down.

4. The documents

   Terms you can enforce

   Covenants, security and seniority decide your recovery. Blue Owl describes detailed document negotiations aimed at finding and reducing risks.

5. The borrower

   Usually a sponsor's company

   Golub calls sponsor finance a partnership between the PE sponsor, the company and the direct lender. Apollo says issuers can negotiate with one or a handful of lenders.

Know each one well enough to use it in a sentence about a real loan.

1. Leverage

   Debt ÷ EBITDA

   Total and senior. Say it in turns: 4.0x is four turns of leverage.

2. Coverage

   EBITDA ÷ cash interest

   Fixed charge coverage is stricter: capex comes off the top and required principal goes on the bottom.

3. Covenants

   Maintenance and incurrence

   Maintenance covenants are tested on a schedule, like a leverage cap each quarter. Incurrence covenants bite only when the company acts, say by borrowing more.

4. Security

   Lien and rank

   First lien lenders have the first claim on pledged assets. Second lien and mezzanine sit behind and charge more for it.

5. Unitranche

   One loan, one rate

   Replaces a senior and junior split with one loan, one rate and one set of documents.

6. Spread

   Base rate plus a margin

   Most direct loans float. A spread of 600 basis points means the base rate plus 6%.

7. OID

   Original issue discount

   The lender funds less than face, say 98 for 100. The 2 points are earned over the loan's life on top of the coupon.

8. Call protection

   A fee for repaying early

   It keeps a borrower from refinancing the moment rates drop, so the lender keeps some of the yield it priced for.

9. Recovery

   Cents on the dollar

   What a lender gets back in a default. It turns on the value of the business in distress and how much debt ranks ahead.

A made-up buyout loan, with tax at 25%. Dollar figures are in millions.

1. The setup

   $25M of EBITDA, bought at 10x

   The sponsor pays 10 × $25M = $250M. You lend $100M at an all-in floating rate of 10%. The sponsor's equity is $150M.

2. Leverage

   4.0x, 40% of value

   $100M ÷ $25M = 4.0x EBITDA. Against the $250M price, the loan is 40% of value.

3. Coverage

   2.5x interest

   Interest is 10% × $100M = $10M. $25M ÷ $10M = 2.5x.

4. Free cash flow

   $7.5M a year

   Pre-tax income is $25M less $5M of D&A and $10M of interest, so $10M. Tax at 25% is $2.5M. $25M less interest, $2.5M of tax and $5M of capex leaves $7.5M.

5. Repayment

   About 13.3 years

   $100M ÷ $7.5M = about 13.3 years at flat cash flow, a little less as interest falls. So a sale or refinancing repays this loan, and that is the risk you are underwriting.

6. Downside

   EBITDA falls 40% to $15M

   Leverage is $100M ÷ $15M = 6.7x and coverage $15M ÷ $10M = 1.5x. Pre-tax income is $0M, so there is no tax, and $15M less $10M of interest and $5M of capex leaves zero free cash flow.

7. Recovery

   90 cents on the dollar

   The company is sold at 6x: 6 × $15M = $90M. Your $100M loan gets back $90M. The sponsor's $150M is gone.

8. The cushion

   Value could fall 60%

   The loan was safe until the business was worth less than $100M, a 60% fall from $250M. That cushion of equity below you is what a lender is really buying.

1. Source

   Origination

   Deals come through a network of industry contacts and portfolio company relationships. Be ready for: why would a sponsor bring this loan to you?

2. Screen

   A first look

   In-house industry expertise shapes a first evaluation with senior management. In two sentences, would you spend a week on it?

3. Diligence

   Financials and documents

   A thorough review of the numbers and detailed negotiation of the documents. Expect to defend which addbacks you accept and which covenants you need.

4. Decide

   Risk against return

   The return is judged against the risk, with a focus on the downside. This is where your downside case and the price come in.

5. Close

   Terms and allocation

   Terms, documents and timeline are finalized, and the loan is split across the firm's funds.

6. Monitor

   Watching the loan

   Regular contact with management and the sponsor. Which early warning sign would you track each quarter?

Keep these short. The interviewer wants to hear that you actually want to lend.

1. 1

   Why private credit and not private equity?

   What a strong answer does

   Name what draws you to the lender's seat: underwriting the downside, structuring terms, a steadier return. Never frame it as a fallback from PE.

   • “What would you miss about owning the equity?”
   • “Which side of a recent buyout would you rather have been on?”
2. 2

   Why direct lending over leveraged finance at a bank?

   What a strong answer does

   A bank arranges loans and sells most of them on. A direct lender holds what it underwrites and lives with the outcome. Build the answer on that.

   • “Why have borrowers moved toward private lenders?”
   • “What does a bank still do better?”
3. 3

   Why has private credit grown, and what could go wrong?

   What a strong answer does

   Speed, certainty and one or a few lenders to deal with, as Apollo puts it. Then name one real risk, like looser terms or a rise in defaults, and say how you would spot it.

   • “What would a recession do to these loans?”
   • “Who are the investors behind the funds?”

The heart of the interview. Say the numbers out loud.

1. 4

   Walk me through how you would decide whether to make a loan.

   What a strong answer does

   The business first, then free cash flow, leverage and coverage, the equity below you and the terms. Close on the downside case and a yes or no.

   • “What is the first question you would ask the sponsor?”
   • “What would make you walk away?”
2. 5

   How much debt can this company support?

   What a strong answer does

   Work from free cash flow and coverage rather than a multiple you have heard. Then test it against what the business can still pay in a bad year. Practice it, see a model answer

   • “How would the answer change for a software company?”
   • “What leverage would make you uneasy here?”
3. 6

   EBITDA is $30M, capex $6M and interest $12M. How well covered is the interest?

   What a strong answer does

   $30M ÷ $12M = 2.5x. After capex it is $24M ÷ $12M = 2.0x, the tighter and more honest number.

   • “Add $3M of required principal. Now what?”
   • “Where would you set a coverage covenant?”
4. 7

   Which addbacks to EBITDA would you accept?

   What a strong answer does

   Real one-off costs with evidence, yes. Projected savings and synergies get a haircut or nothing. Each dollar added back raises the debt the company appears to support.

   • “How would you cap addbacks in the documents?”
   • “What does a quality of earnings report tell you?”
5. 8

   What makes a company a good borrower?

   What a strong answer does

   Recurring revenue, steady margins, low capex, a market position that survives a bad year and a sponsor with real equity at risk. The LBO checklist, read for safety. Practice it, see a model answer

6. 9

   You like the company. What would still make you pass on the loan?

   What a strong answer does

   A price too thin for the risk, loose covenants, too little equity below you, or one customer that can sink it. Show you can tell a good business from a good loan.

What you can enforce decides what you get back.

1. 10

   What is the difference between maintenance and incurrence covenants?

   What a strong answer does

   Define both in a line each, then say why a lender wants maintenance tests: they give an early seat at the table before the cash runs out.

   • “Why does a lender want maintenance covenants?”
   • “What happens the day one is breached?”
2. 11

   What is a unitranche loan, and why would a sponsor choose one?

   What a strong answer does

   Lead with what the sponsor gains: speed and a single counterparty to deal with. Then the cost, a blended rate above a pure first lien.

   • “How might lenders split a unitranche among themselves?”
   • “When would a sponsor rather have separate tranches?”
3. 12

   Rank first lien, second lien, mezzanine and equity, and say why each costs what it does.

   What a strong answer does

   Order of claim and security set the price. First lien is paid first and costs least. Mezzanine is often unsecured and may pay part in kind. Equity takes what is left. Practice it, see a model answer

4. 13

   How does PIK interest work, and why would a lender accept it?

   What a strong answer does

   Interest is added to principal instead of paid in cash, so the debt grows. A lender takes it for a higher rate when the borrower needs its cash for something else. Practice it, see a model answer

5. 14

   What does a lender recover if the company defaults?

   What a strong answer does

   The value of the business in distress, less claims ranked ahead, over your claim. In the worked loan above, a sale at 6x returns 90 cents.

   • “Why might a distressed sale fetch less than you expect?”
   • “What is the fulcrum security?”

How a loan earns, and what it gives up to earn it.

1. 15

   A loan pays 10%, was funded at 98 and has a four-year life. Roughly what does it yield?

   What a strong answer does

   Spread the 2 points of discount over a four-year life: 0.5 a year. (10 + 0.5) ÷ 98 is about 10.7%.

   • “What if the borrower repays after one year?”
   • “Why do lenders take OID rather than a higher coupon?”
2. 16

   Why would a fund take 10% on a loan when private equity aims for 20%?

   What a strong answer does

   Seniority and the equity cushion below you. Compare returns after expected losses, and say what the loan loses in a bad year.

   • “What default rate would wipe out the gap over a safer loan?”
   • “How would you compare a loan's return with an equity deal's IRR?”
3. 17

   What is call protection, and why do lenders negotiate for it?

   What a strong answer does

   Frame it as protecting the yield you priced for. A strong borrower refinances as soon as money is cheaper, which is exactly when the lender wants to stay in.

   • “Why would a borrower agree to it?”
   • “What is a make-whole?”

Three shapes a case or model question can take.

1. 18

   Walk me through an LBO from the lender's side.

   What a strong answer does

   Same mechanics, other seat: sources and uses, how much of the price is debt, the cash flow that services it and how fast leverage falls. End on the lender's exposure. The sponsor's IRR is someone else's problem. Practice it, see a model answer

2. 19

   EBITDA falls 30%. Does the loan still get repaid?

   What a strong answer does

   Rerun leverage, coverage and free cash flow on the lower number, then value the business at a lower multiple. Say where the covenant breaks and what you would recover.

   • “What multiple would a buyer pay in that world?”
   • “What would you ask the sponsor to put in?”
3. 20

   Here are a company's financials. Would you lend, and on what terms?

   What a strong answer does

   Give a yes or no, the amount, the price, the covenants you need and the one risk that could break it. A one-page credit memo runs in the same order.

   • “What is your downside case?”
   • “What would make you lend more?”

• Pitching the upside

  A lender doesn't share in it. Talk about what the business can survive.

• Taking adjusted EBITDA on trust

  Addbacks inflate the number your leverage rests on. Ask which ones are real before you size the loan.

• Skipping the documents

  Two loans with the same leverage can recover very different amounts. Covenants, security and rank make the difference.

• No breaking point

  Say where it breaks. In the worked loan, interest coverage hits 1.0x when EBITDA falls to $10M, 60% below today.

1. Days 1 to 3

   Learn the ratios on one company

   Pick a public company with debt. From its filings, work out leverage, coverage and free cash flow after interest.

2. Days 4 to 7

   Build a downside case

   Cut EBITDA by 20%, 30% and 40%. Find where coverage drops below 1.5x and what a sale at a lower multiple would recover.

3. Week 2

   Write a one-page credit memo

   Business, numbers, structure, risks, recommendation. Then say it in two minutes without notes.

4. Week 2

   Rehearse out loud

   Answer the 20 questions above aloud and have someone push on your downside numbers until they hold.