Over the last few years, I have interviewed many Interns, Graduates, Analysts and some Associates. Key observations from all those Interviews, you understand almost immediately who prepared and who understands what Leveraged Finance and Credit are about.

While there are many specifics you have to move away from the equity point of view, credit is heavily focused on risk assessments.

What does that mean? We structure deals, underwrite them, and distribute them to credit investors. This means, even if your business as a banker is to sell the deal you will need to do so at market terms. And this is where it gets interesting, credit investors are downside focused, meaning its more important to assess risks and avoid losses rather than maximizing profits.

Think about it, you can earn your coupon / margin but this is the maximum you will receive. You have a different position in the capital structure, hence you are not seeing the upside an equity investor has on a great deal. And while some deals don’t work out the equity investor can do 2x, 3x or more on another investment. A debt investor needs to make its return partly by not losing money because they won’t make up for it with another loan. Return expectations are different as well, credit investing is not about squeezing out the last basis points of return unless you are operating in the opportunistic space.

If you keep that in mind you are already one step closer. But let’s jump into some of the most common questions.

This isn’t a technical question, but it is one of the most important ones. After the usual introductions, this is often the first real question you get, and it sets the tone for the entire interview. Getting it right matters more than people think.

A clean way to structure your answer is in two parts:

(i) your general motivation and (ii) one deal you’ve followed.

There are plenty of valid reasons to be interested in Leveraged Finance, and I’ll leave the “eventual exit to credit funds or PE” story to you. What genuinely makes LevFin interesting to me is where it sits in the bank.

On the one hand, it’s very project driven. You’re right in the middle of acquisitions and LBOs, working closely with the Private Equity ecosystem. You collaborate with Industry Coverage and M&A teams, PE sponsors, legal counsel, and rating agencies, which gives you a front-row seat to how deals actually get done. That exposure is hard to replicate elsewhere and incredibly valuable early in your career.

On the other hand, you’re plugged into capital markets. LevFin isn’t a pure flow business like DCM, but you’re still constantly following the market. Pricing, leverage levels, investor appetite, all of it moves with central bank decisions, politics, macro events, and overall sentiment. If you enjoy understanding why markets move and how that feeds directly into real transactions, LevFin is a great place to be.

If you can clearly articulate that you’re excited about this intersection of deal execution and markets, most interviewers will immediately lean in.

The second part is about showing curiosity. Pick a deal, you don’t need insane technical depth. An LBO in an industry you like works perfectly. Even better: a transaction the team you’re interviewing with has worked on. Bonus points here, because bankers love talking about their own deals (and getting credit for them).

The goal isn’t to impress with complexity, but to show that you follow the market, understand the basic structure, and can talk sensibly about why the deal made sense in that environment.

You might have heard about the characteristics of a good LBO candidate, and that’s not a coincidence. A strong credit profile looks very similar. 

Let’s start with the elephant in the room: stable cash flows.

This answer is simple, but it’s also the right one. Why? Because stable cash flows are not a standalone feature, they’re the outcome of almost every positive qualitative and quantitative credit characteristic.

To structure the discussion, it helps to think about qualitative and quantitative factors separately. Qualitative aspects ensure that the numbers hold up over time; quantitative aspects tell you how much room for error you actually have.

Qualitative Credit Aspects

As mentioned, you’re essentially looking for the same attributes that define a solid LBO candidate. Key qualitative points include:

The common thread here is resilience: how well the business holds up when conditions are less than ideal.

Quantitative Credit Aspects

This is where I would walk from the top line down to free cash flow, explaining step by step where the analytical focus lies.

It starts with the predictability of revenues, then moves into the cost structure, which is often underappreciated but absolutely critical. A business with a high proportion of variable costs can better protect EBITDA if volumes disappoint. In a downside scenario, that flexibility can be the difference between a temporary earnings dip and a liquidity problem.

From there, two items deserve special attention:

Working capital movements, which can be a major cash drain or source depending on the business model. 

Capex requirements, particularly maintenance capex versus growth capex, and how discretionary those investments really are

Interest costs and taxes obviously matter, but they are largely a function of deal structure rather than business quality. They shouldn’t be ignored, but they are typically not the main focus when discussing underlying credit strength in an interview setting.

All of this easily gives you one to two minutes of structured, high-quality discussion in an interview. And if you dig deeper, you’ll quickly realize this is just the tip of the iceberg. Credit analysis ultimately comes down to risk, and every industry and business model has its own pressure points.

The key is showing that you know where to look.

…and why.

That’s where it gets difficult, and it’s also the part that colleagues from advisory often underestimate. Finding a leverage level that works in a new LBO can be surprisingly complex and time-consuming. There’s no simple scorecard that tells you “this is the right answer.” Yet clients will always ask for it, so you need a framework.

In interviews, candidates are typically expected to cover three core pillars:

This is the most fundamental input and is driven by the issuer’s business plan. From a banking perspective, the key question is whether the company has the capacity to service and reduce debt over a typical seven-year holding period.

Under Fed and ECB guidelines, issuers should be able to generate sufficient cash flows to repay roughly 50% of their debt over the life of the transaction. Importantly, this is assessed using a bank case, a more conservative business plan than the sponsor case.

Will the company repay that debt in reality? Probably not. This is a theoretical stress test rather than a prediction. In practice, sponsors would usually prefer to upstream cash via dividends. Still, this exercise gives comfort around repayment capacity, expected deleverage, and the sustainability of key credit metrics such as interest coverage (EBITDA / interest expense).

If the business can pass this test, leverage starts to look defensible.

Even without a detailed business plan, you can often give a reasonable leverage indication simply by understanding the business and its industry.

A cyclical chemicals company will support a very different leverage profile than a software business with highly recurring, contract-backed revenues. That difference directly reflects underlying credit quality, essentially looping back to point one.

To calibrate this, you look at precedent transactions in the sector and analyze the capital structures that have been accepted by the market. Importantly, this requires drilling down beyond headline sectors. For example, within chemicals, leverage tolerance can differ materially between specialty chemicals and basic commodity chemicals, and that difference typically shows up not only in leverage but also in valuation and covenant structure.

This is the third pillar, and the one most often overlooked in interviews.

Credit analysis is not just about the amount of debt; it’s also about the equity sitting beneath it. As a debt holder, your returns are capped, but your risk is lower. In distress scenarios, you sit ahead of equity and expect higher recoveries.

However, equity plays another crucial role: incentive alignment. A sponsor with only 10% equity at risk will behave very differently from one with 40–50% invested. The more equity at stake, the stronger the incentive to protect the capital structure and support the business through downturns.

As a rule of thumb, markets have historically been comfortable with around 40% equity and equity-like instruments in LBO structures, though this can move depending on asset quality and cycle positioning.

Putting it all together, leverage is never the output of a formula. It’s the result of judgment, grounded in cash flow durability, informed by market precedent, and disciplined by equity alignment. That’s exactly what interviewers want to hear: not a number, but a framework that explains how you arrive at one.

In leveraged finance you see debt ranging from senior secured instruments like revolvers and Term Loan Bs, through unsecured and high-yield bonds, to junior capital such as second lien and mezzanine debt, with increasing risk, pricing, and flexibility as you move down the capital structure.

In your day to day as a banker you will work mostly on RCFs, Term Loans and Senior Secured Notes and often they all rank pari passu.

A Revolving Credit Facility is a credit line that the company has which it can draw on and repay as often as it needs to. It is usually undrawn at closing and can be used to finance net working capital swings, smaller M&A transaction or any other business needs. This capital is provided by a number of relationship banks, who commit to this line with the idea of doing more business with this client going forward. It is not a lucrative product for banks on a standalone basis usually and more of an “entry ticket” for investment banking and commercial banking business. Most frequent tenor is 6.5 years since banks like to have a shorter maturity compared to institutional investors (i.e. no temporal subordination). RCFs are typically secured and rank either above other outstanding debt or pari passu (which means side-by-side" or „on equal footing"). The total size of those undrawn lines varies greatly and depend on the borrowers’ need and banks appetite. You will often see it being 0.5-1.0x of EBITDA but there are no rules. 

You will differentiate mostly about a TLA and TLB. A Term Loan A (TLA) is a senior secured bank loan, typically amortizing, that sits at the top of a company’s capital structure. It’s usually held by relationship banks, carries lower interest than other term loans, and is designed to be paid down steadily over its life rather than at maturity. It can be used for issuers that don’t reach that critical amount which is required to approach markets or simply as a cheap alternative. Within Leveraged Finance it is not always liked by the banks given high capital costs holding loans for low rated issuers on the balance sheet. 

A TLB is a senior secured loan, typically with a maturity of 7 years. While it could be amortizing the market standard is a bullet repayment (this means 100% repaid at maturity, it is only paying interest over the time of the loan). Exception are US Term Loans seeing a mandatory 1% repayment. It can be drawn once and repaid at any time, once repaid you cannot draw it again even if repaid before the contractual maturity. A TLB typically requires at least two public ratings to draw attention of larger asset managers. Size of the loan could start as low as €250m but a size of at least €/$400-500m is recommended to ensure liquidity. On the larger end you can raise up to €/$2.0-2.5bn. Pricing is based on a margin, this means you have a base rate (EURIBOR or SONIA) and on top issuers pay the agreed margin. Pricing is a tricky part and there will be a write up to form a view on this.

Pros: 

+ Usually you find a „leverage grid" in the legal documentation and issuers will benefit from lower margins once they are able to de-leverage

+ Flexibility to pre-pay

+ Flexibility around ratings for smaller deals

Cons:

- Only offer senior secured options

- Less favourable to challenged / cyclical credits

- Requires the RCF to be pari-passu

- New money deals often require due diligence

A High Yield Bond is a public instrument and typically describes any bond rated below the BB+ threshold. The bond can be senior secured (SSN) or unsecured (SUN). Typical tenor of a bond is between 5-8 years, and redemption depends on a call schedule (a premium paid for early redemption in the first years and typically reducing over time). Similar to Term Loans there is a minimum size of €/$200-250m, but it is recommended to reach the €/$400-500m area to ensure sufficient liquidity (Investors feel more comfortable having a larger instrument and investor universe which leaves options to sell its share). A bond requires an Offering Memorandum, this is a document that outlines the issuer’s business, financials, risk factors, capital structure, use of proceeds, terms of the notes (including covenants), and legal / tax considerations to allow investors to assess the credit and the offering

Pros:

+ Most open to cyclical and challenged credits 

+ Flexibility around tenors

+ Can easily co-exist with other debt in a structure

Cons:

- Pricing sensitive and more dependent on market conditions, stronger reaction to macro events

- Lower flexibility for pre-payment due to call schedule

- Issuance and Offering Memorandum are highly visible, high share of information being disclosed

- Significant time (and cost) investment for a debut

- Issuance can only take place within certain time periods after audited / reviewed financials are published

 PIK is not a standalone instrument but rather an instrument feature, however you will see a PIK in almost all LBOs. PIK means pay-in-kind, which is a non-cash interest payment. It is seen as more risky and hence more expensive. The interest portion is covered by issuing more debt which leads to a higher principal amount. Due to payments in more debt, it is compounding making it even riskier. For Sponsors its often seen as an instrument which is more equity like due to its characteristics and return profile. Often this type of debt is sitting outside the restricted group, which means its claims are coming after that of the cash paying senior debt.

It is a useful instrument as well in HoldCo scenarios where you don’t have guaranteed dividend payments to service the debt. Typically you have a toggle feature, which allows you to pay in cash if available, and if not you pay in kind. It is also a feature for challenged credits or restructuring scenarios where you want to preserve near-term liquidity.

Pros:

+ Preserving liquidity easing pressure on cash flows

+ Allowing sponsors to lower capital needs by structuring PIK as equity like instrument

+ Can serve as a tax shield depending on local taxation rules and overall structure

Cons:

- Compounding making it an expensive instrument

- Higher costs compared to cash pay instruments

- Increases refinancing risk

- Possibly not liked by other lending groups when it is reducing the sponsors equity stake in the company

These concepts are highly relevant in day-to-day work, and while it’s uncommon to walk through them verbally in an interview, they are frequently tested in modelling exercises.

Sources & Uses show where funding comes from and how it is deployed. When building them, it’s generally best to start with the uses and then determine the required sources. The two must balance: if sources exceed uses, the excess typically appears as cash on the balance sheet; if uses exceed sources, the transaction is underfunded.

Let’s look at a simple example. A sponsor has identified a target with EBITDA of $250m, valued at 10.0x EV/EBITDA, and existing debt of $500m. To finance the acquisition, the sponsor raises $1,000m of term loans and $400m of senior unsecured notes (SUNs). For simplicity, we assume no transaction fees and zero cash at close, focusing only on headline values.

Sources and Uses:

Final step, let’s look at the capital structure, how to present it and the information to provide. The senior debt will have its maturity after 7 years, the Term Loan is priced at S+400bps, the SUN at 8.50% coupon with a maturity of 8 years. There is a RCF at 1x turn EBITDA.

With just the Sources & Uses and the capital structure, you can already present a significant amount of information in a clear and concise format. They show how the transaction is financed, how the capital stack is constructed, and typically include key terms such as pricing and maturity (often shown as month and year), as well as additional details like instrument ratings.

While much of this information can be found in the detailed instrument descriptions above and in the primer lets quickly run through the thinking behind this structure. Starting with the Term Loan B, it offers flexibility for the sponsor: it is a private instrument that allows the business plan to be marketed to institutional investors, features floating-rate pricing, and often includes margin step-downs as the company deleverages. In addition, TLBs can be repriced relatively easily if market conditions improve. The revolving credit facility is typically priced around 50 bps inside the term loan and has a shorter maturity, which is standard for senior secured bank debt.

The senior unsecured notes (SUNs) provide incremental capital at an all-in cost of 8.50%. Because the notes are unsecured, they carry higher risk and therefore higher pricing. Their maturity typically sits outside that of the senior secured debt, which is standard market practice to protect senior lenders and preserve the capital structure hierarchy.

As noted earlier, while you are unlikely to walk through this level of detail verbally in an interview, it is important to be comfortable with the format and logic, particularly for modelling tests.

I’ll spare you a detailed discussion of accounting questions, there are already plenty of guides that cover them in depth. That said, nearly all interviewers will test accounting fundamentals, whether through standard questions such as how an increase in D&A affects the three financial statements, or through more nuanced follow-ups.

What’s worth emphasizing here is the approach. A clear and structured way to answer these questions is to start with the income statement, moving from revenues down to net income. From there, continue to the cash flow statement, which begins with net income and walks through cash flows from operations, investing, and financing, ultimately arriving at the change in cash. The balance sheet comes last, reflecting net income flowing into retained earnings and the corresponding change in cash on the asset side.

This is not the only way to work through accounting questions, but there is a reason it is widely recommended. Most candidates, probably 80–90%, use this structure, as it aligns with the logic taught in most interview guides and helps ensure answers are clear, consistent, and easy to follow.

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I hope you can use some of the content provided in your next interview and maybe you even learned something. I would be curious to hear from you if you had any interviews recently, from Intern to Associate Level to come up with a second part.

If you have ideas or feedback, feel free to reach out at [email protected].

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