Debt Capital Markets interview preparation

Questions

100

Traced to a firm

45

Firms

26

Updated

September 2026

Asked at

All firmsTSTruist Securities5PIMCO4TD Securities4Apollo Global Management3Nomura3Scotiabank3Bain Capital2Houlihan Lokey2Mizuho2Neuberger Berman2Oaktree Capital Management2RCRBC Capital Markets2Carlyle Group1Deutsche Bank1Golub Capital1HPS Investment Partners1Invesco1KKR1Lazard1Moelis & Company1Moody's1Northern Trust1NUNuveen1Rothschild & Co1S&P Global1Wells Fargo Securities1

Topic

All topicsBond mechanics11Duration and convexity6Yield curve and rates5Credit spreads5Credit analysis and ratings13Credit modelling9Primary issuance9Syndication and loans10Structured credit7Covenants and documentation5Liability management5Indian debt markets7Fit8

Level

AnyCoreIntermediateHard

Type

AnyTechnicalBrainteaserMarket viewCaseFit

1. 038How do you calculate covenant headroom, and how would you monitor it?Credit analysis and ratingsHardtechnicalLeveraged financePrivate credit

   Say this

   Headroom is the percentage EBITDA decline you can absorb before you breach. If the covenant is 5 times net leverage and you are at 4 times, EBITDA can fall about 20 percent before you trip, because 4 divided by 5 is 0.8. Then you sanity-check it against what the business actually does in a downturn.

   Then walk it

   1. For a leverage covenant: headroom equals one minus current leverage over covenant leverage. At 4 times against a 5 times test, that is 20 percent of EBITDA.
   2. For a coverage covenant you do the same on the other side. At 3 times interest cover against a 2 times test, EBITDA can fall a third. Note that a floating rate borrower's headroom shrinks when rates rise even if EBITDA is flat.
   3. Then the definitional work, which is most of the real job. Covenant EBITDA is not reported EBITDA: it includes pro forma run-rate synergies, cost savings, exceptional add-backs and sometimes contributions from acquisitions before they close. Headroom calculated on covenant EBITDA can be double the headroom on reported EBITDA.
   4. Then check the covenant step-downs. Many deals tighten the test over time — 5 times falling to 4.5 in year three — so headroom shrinks on a schedule regardless of performance. That is a calendar risk you can see coming.
   5. Monitoring: quarterly compliance certificates, the gap between reported and covenant EBITDA over time, and the trend in headroom rather than the level. A credit going from 35 percent to 20 percent to 12 percent headroom over three quarters is the signal; the absolute number is not.
   6. The honest caveat: on a covenant-lite deal there is no maintenance test to have headroom against, so you monitor the incurrence ratios and the liquidity runway instead.

   Where candidates lose it

   Calculating headroom off reported EBITDA. Almost every leveraged credit's covenant EBITDA is materially higher because of add-backs, and a lender who has not read the definition is measuring the wrong thing. Also watch for scheduled step-downs, which shrink headroom with no operational cause.

   Expect next

   • How would you test whether the add-backs are real?
   • What happens to headroom when rates rise?
   • How do you monitor a covenant-lite credit?
2. 040The company has filed. What is the recovery on each claim?Credit analysis and ratingsHardcase studyHoulihan LokeyRestructuring · New York · 2026

   Say this

   Build one number and then a waterfall. Estimate the going-concern enterprise value, then allocate it strictly in priority order until it runs out. The claim where the value stops is the fulcrum security, and that is the one that converts into the equity of the reorganised company.

   Then walk it

   1. Step one, the value. Reorganisation EBITDA times a distressed-but-credible multiple, cross-checked against a DCF and any market evidence such as where the debt trades. Say your assumption out loud, because the answer is entirely driven by it.
   2. Step two, the claims, in order: DIP financing and administrative claims first, then priority and secured claims to the extent of their collateral, then unsecured, then subordinated, then preferred, then common. Note that the unsecured portion of an undersecured claim drops down to rank with general unsecured.
   3. Step three, allocate. Worked example: enterprise value 600, admin and DIP 50, first lien 400, second lien 200, unsecured notes 150. Admin takes 50, first lien takes its full 400, leaving 150 for the second lien, which recovers 75 percent and gets the equity. Unsecured notes and below get nothing.
   4. So the second lien is the fulcrum. Above it everything is money-good and cares only about getting paid; below it everything is out of the money and will litigate for option value rather than economics.
   5. And the negotiated reality. Out-of-the-money classes have blocking and litigation rights, so they usually extract a tip — a few points of equity or warrants — to avoid delay. Textbook absolute priority is the starting point, not the outcome.
   6. State your sensitivity: at a 5 times multiple instead of 6, the second lien recovers 25 percent rather than 75 and the fulcrum moves up into the first lien. That is how leveraged the answer is to one assumption.

   Where candidates lose it

   Going straight to the waterfall without first stating an enterprise value and the multiple behind it. The waterfall is arithmetic; the value is the judgement. And forgetting that an undersecured claim splits, with the deficiency ranking as unsecured, is the most common technical error here.

   Expect next

   • Where does the fulcrum move if the multiple is 5 times?
   • How would you value the consideration if it is new equity?
   • Why do out-of-the-money classes get anything at all?

   Reported by candidates at Houlihan Lokey (Restructuring, New York, 2026). Source: Wall Street Oasis.

3. 048Value this construction company and tell me whether they are worth lending to.Credit modellingHardcase studyBain CapitalCredit · New York · 2024

   Say this

   Construction is one of the hardest credits there is, so I would lead with that. Value it on a low mid-single-digit EBITDA multiple, discount the earnings heavily for contract risk, and lend only against a secured, amortising structure with tight liquidity covenants — or not at all if the contracts are fixed-price and the backlog is concentrated.

   Then walk it

   1. Valuation first: EBITDA times a multiple, and construction trades cheap — typically 4 to 6 times for a contractor, versus 10-plus for business services, because earnings are project-based, low-margin and non-recurring. Cross-check against net asset value, since plant and equipment have real resale markets.
   2. The critical adjustment is that reported EBITDA is an accounting output, not cash. Percentage-of-completion accounting lets a contractor recognise profit on estimates of cost to complete. So I would look at cumulative cash flow versus cumulative reported EBITDA over five years. A persistent gap is the single biggest red flag in the sector.
   3. Then the specific risks: fixed-price contracts with input cost inflation, which is what killed Carillion; claims and variation disputes that sit as receivables for years; performance bonds and surety capacity, which is a hard constraint on growth; joint and several liability in joint ventures; and single-project concentration.
   4. Working capital is brutal and cyclical. Retentions, milestone billing and advance payments mean the balance sheet can show net cash at the peak of a billing cycle and a hole three months later. So I would look at average rather than period-end net debt.
   5. The lending decision: yes, but structured. First lien on receivables and equipment, an amortising term loan rather than a bullet, a minimum liquidity covenant rather than just leverage, monthly reporting on contract-level margins, and a hard cap on new fixed-price work. Leverage no more than 2 to 2.5 times against a business I would lend 4 to 5 times if it were subscription revenue.
   6. And I would say what would make me decline: backlog concentrated in one or two fixed-price contracts, a reported-versus-cash EBITDA gap, or a surety provider pulling capacity. Any of those and the answer is no at any price.

   Where candidates lose it

   Applying a generic EBITDA multiple and a generic leverage test. This sector's whole point is that reported profit is an estimate and the working capital cycle is deceptive. If you do not mention percentage-of-completion accounting or average versus period-end net debt, you have missed why they chose construction.

   Expect next

   • How would you test the cost-to-complete estimates?
   • What leverage would you actually lend at?
   • What single disclosure would make you walk away?

   Reported by candidates at Bain Capital (Credit, New York, 2024). Source: Wall Street Oasis.

4. 056How does allocation work, and why does the syndicate care who gets the bonds?Primary issuanceHardsuperdaySyndicate desks

   Say this

   The syndicate proposes an allocation and the issuer signs it off. Real money accounts — insurers, pension funds, long-only credit funds — get filled disproportionately, and fast money gets scaled hard. The reason is secondary performance: the bond's price behaviour in week one depends on who holds it.

   Then walk it

   1. Mechanically, a 750 million deal with a 2.5 billion book has to scale everyone. But it is not pro rata. Each account is assessed on order size, price sensitivity, whether it came in early, whether it holds or flips, and whether it supports the issuer's deals generally.
   2. The commercial logic: if you fill flippers, the bonds come straight back to the street on day one and the spread widens. If you fill buy-and-hold accounts, there is no supply and the bond tightens. The issuer sees a successful deal and the accounts see a gain.
   3. So the allocation is effectively the syndicate rewarding accounts that behave well over time. That is a real relationship currency and it is why accounts care about being treated properly on hot deals.
   4. The issuer has views too, and they can be strategic: favouring investors in their home market, accounts that have supported them through a difficult period, or building a base in a new currency. Legally the allocation is the issuer's decision on the bookrunners' recommendation.
   5. Conflicts to be honest about: the banks also have their own accounts and their own trading books. Regulators in several jurisdictions have looked hard at allocation practices, and most banks now have documented allocation policies with a compliance sign-off.
   6. One practical detail that shows you know the mechanics: allocations go out after pricing but before free-to-trade, and the grey market starts trading on expected allocations. So a badly leaked book moves the price before anyone has received a single bond.

   Where candidates lose it

   Saying allocation is pro rata. It is deliberately not, and the whole skill of a syndicate desk is judging which accounts produce a stable aftermarket. If you cannot explain why filling fast money hurts secondary performance, you have missed the question.

   Expect next

   • How would you handle an account you know flips?
   • What is the grey market?
   • Who legally decides the allocation?
5. 064What is a hung deal, and how does a bank get out of one?Syndication and loansHardsuperdayLeveraged financeSyndicate desks

   Say this

   A hung deal is an underwritten financing the arranger cannot syndicate at or inside the flexed terms, so it stays on the bank's balance sheet. You get out of it three ways: sell at a discount and take the loss, hold and wait for the market to come back, or restructure the financing with the sponsor's help.

   Then walk it

   1. How it happens: the bank signs an underwritten commitment when markets are good, then markets deteriorate between signing and syndication. That window is typically two to four months on a large LBO, which is plenty of time for spreads to move 200 basis points.
   2. Once flex is exhausted, the options are all bad. Sell at an original issue discount deep enough to clear — 85 or 90 cents, with the discount coming out of the bank's fees and then its capital. Hold it on balance sheet, which consumes capital and gets marked to market every quarter. Or reopen the structure with the sponsor.
   3. The sponsor-assisted routes: the sponsor writes a larger equity cheque, takes back a vendor note or PIK piece, or buys a slice of its own debt. Sponsors do this to preserve the bank relationship and to get the deal done, but it hits their returns.
   4. Real numbers from the last cycle: the Citrix and Twitter financings in 2022 are the reference cases. Banks sold Citrix paper in the 80s and took reported losses in the hundreds of millions on a single deal, and several large hung positions sat on balance sheets into 2023.
   5. The knock-on effects are what an interviewer wants next. A bank carrying hung paper stops underwriting, which shuts the LBO market, which is why large-cap sponsor M&A dried up through 2022 and private credit took share by offering certainty without market risk.
   6. The preventative measures banks now use: smaller underwriting tickets, larger bank groups, wider flex and lower caps, pre-marketing to anchor investors before signing, and in some cases syndicating the risk to private credit funds up front.

   Where candidates lose it

   Confusing a hung deal with a credit problem. The borrower may be fine. The loss is a market-price loss on paper the bank could not distribute, and saying that distinction out loud is what shows you understand underwriting risk.

   Expect next

   • Who bore the loss on Citrix?
   • How has underwriting practice changed since 2022?
   • Why did private credit win share from this?
6. 067What are the primary categories of collateral securing an asset-based loan, and what are the nuances for each?Syndication and loansHardtechnicalTSTruist SecuritiesAsset Finance · Atlanta · 2023

   Say this

   Four main categories: accounts receivable, inventory, machinery and equipment, and real estate. Each gets an advance rate in the borrowing base, and the nuance is in the eligibility criteria and the dilution reserves, because that is where the actual availability is won or lost.

   Then walk it

   1. Receivables: the best collateral, typically 85 percent advance rate. But only eligible receivables count — under 90 days, not from an affiliate, not cross-aged, not from a concentrated or foreign or government obligor. Then you take dilution reserves for credit notes, returns and discounts. A 15 percent dilution rate can cut effective availability far below the headline rate.
   2. Inventory: typically 50 to 65 percent of cost, or an advance rate against net orderly liquidation value from a third-party appraiser. Raw materials and finished goods are worth more than work in progress, which is often worth nothing. Perishable, fashion-dated and bespoke inventory gets haircut hard, and consignment or landed-in-transit inventory has title issues.
   3. Machinery and equipment: advance rate against a forced-liquidation appraisal, often 70 to 80 percent of that value, which itself may be a fraction of book. Generic assets with a resale market — trucks, standard CNC machines — hold value; purpose-built process equipment does not.
   4. Real estate: often 50 to 65 percent of appraised value, amortising, and slow to realise. Environmental liability is the specific nuance, because a contaminated site can be worth less than zero to a lender who takes title.
   5. Cross-cutting nuances that matter more than the advance rates: perfection of the security interest, priority against purchase money security interests and landlord or warehouseman liens, the ability to control the cash through a dominion of funds arrangement, and field examinations plus appraisals at least annually.
   6. A worked number: 100 of gross receivables with 10 ineligible and 10 percent dilution reserve gives roughly 90 eligible less 9 reserve, so 81, times an 85 percent advance rate equals about 69 of availability. The headline 85 percent became an effective 69 percent.

   Where candidates lose it

   Quoting advance rates with no eligibility or dilution discussion. Availability is set by the eligibility criteria and the reserves, not by the headline percentages, and any ABL lender will test that. Also, do not forget the field exam and appraisal cadence — ABL is a monitoring business.

   Expect next

   • How would you size availability on 100 of gross receivables?
   • What is a springing fixed charge coverage test?
   • Which inventory would you refuse to lend against?

   Reported by candidates at Truist Securities (Asset Finance, Atlanta, 2023). Source: Wall Street Oasis.

7. 069What is structured finance, how would you evaluate it, and what are the credit risks?Structured creditHardtechnicalMoody'sCredit Risk · New York · 2024

   Say this

   Structured finance pools cash-flow-generating assets in a bankruptcy-remote vehicle and issues tranched debt against them, so the credit risk of the notes comes from the pool and the structure rather than from a corporate. You evaluate it in three layers: the collateral, the structure, and the counterparties. And you assume correlation is higher than the model says.

   Then walk it

   1. The mechanics: a true sale of assets into an SPV, so the notes are isolated from the originator's insolvency. The SPV issues senior through mezzanine to equity, and losses hit from the bottom up while cash pays from the top down. That subordination is what manufactures a AAA out of a pool of BBB-quality assets.
   2. Layer one, collateral: what are the assets, what is their historical default and loss experience, how granular and diversified is the pool, what are the underwriting standards, and how will they behave in a recession rather than in the sample period.
   3. Layer two, structure: attachment and detachment points, excess spread, overcollateralisation, reserve funds, the payment waterfall, sequential versus pro rata principal, and the triggers that divert cash to the seniors when performance deteriorates. Also whether the pool is static or managed.
   4. Layer three, counterparties and operations: the servicer, because a securitisation is only as good as collections; the swap counterparty; the trustee; and the originator's alignment, which is why regulators require risk retention of 5 percent.
   5. The core credit risks, in order of how much damage they do: correlation, which is the 2007 lesson — tranching protects you against idiosyncratic default and not against a common shock; model risk in the assumed default and prepayment curves; servicer failure; and basis or timing mismatches between asset and liability cash flows.
   6. The honest limitation for an interview: structured finance ratings depend on assumptions that cannot be observed directly. Two analysts with the same pool and different correlation assumptions get different ratings, and the history of the asset class is largely a history of that assumption being too optimistic.

   Where candidates lose it

   Describing the tranching mechanics and stopping. The interviewer — especially at an agency — wants the risk analysis, and the answer must name correlation and model risk explicitly. Saying tranching protects against idiosyncratic but not systematic loss is the single sentence that carries this question.

   Expect next

   • What does risk retention achieve?
   • Why did 2007-vintage CDOs fail when the underlying was rated?
   • How would you stress a static pool versus a managed one?

   Reported by candidates at Moody's (Credit Risk, New York, 2024). Source: Wall Street Oasis.

8. 075How would you approach building a delinquency model?Structured creditHardcase studyNeuberger BermanRisk · Chicago · 2024

   Say this

   I would build it as a roll-rate transition model on vintage cohorts, then overlay macro sensitivity. Group loans by origination vintage and current bucket — current, 30, 60, 90 plus, charge-off — estimate the monthly transition probabilities from history, and project forward. Then stress the transition matrix against unemployment rather than adding a flat haircut.

   Then walk it

   1. Vintage cohorts are the critical design choice. Delinquency depends heavily on seasoning — losses peak 18 to 30 months after origination for consumer loans — so a portfolio-level rate mixes young and mature cohorts and tells you nothing. Vintage curves separate credit quality from portfolio growth.
   2. Roll rates: for each bucket, the probability of moving to the next bucket, staying, or curing back. Estimate from history by segment, because a prime and subprime cohort have completely different cure rates. The 30-to-60 roll rate is usually the most informative early indicator.
   3. Then charge-off and recovery: a loan that reaches 90-plus rolls to charge-off with some probability and lag, and you apply a recovery assumption net of collection costs and time. Loss equals default rate times loss given default, and both need to be modelled, not assumed.
   4. Macro overlay: regress historical roll rates on unemployment, real income and, for secured pools, collateral values. Then run scenarios. This is what regulators require for CECL and IFRS 9 expected credit loss, so the framework is standard rather than exotic.
   5. Validation is where the marks are: back-test on a holdout period, check stability of the transition matrix over time, and watch for the growth illusion — a rapidly growing book has an artificially low delinquency rate because the denominator is full of young loans. That single effect has masked deterioration in countless portfolios.
   6. The honest limitations: roll rates are unstable through structural breaks, and the 2020 payment deferral programmes broke every consumer model because delinquency artificially vanished. So I would report the model output alongside the vintage curves themselves, because the raw curves are harder to fool than the projection.

   Where candidates lose it

   Proposing a single portfolio-level delinquency rate or a regression on borrower characteristics alone. The two things that make this a real answer are vintage cohorts, which control for seasoning, and roll-rate transitions. And naming the growth illusion — a fast-growing book looks clean — is what shows you have seen this go wrong.

   Expect next

   • Why does a growing book understate delinquency?
   • How would you handle the 2020 deferral distortion?
   • Which roll rate is the best early warning?

   Reported by candidates at Neuberger Berman (Risk, Chicago, 2024). Source: Wall Street Oasis.

9. 083What is a liability management exercise, and explain a drop-down and an uptier.Liability managementHardsuperdayRestructuringPrivate credit

   Say this

   A liability management exercise is an out-of-court transaction that uses permissive document capacity to raise new money or cut debt, usually at some existing lenders' expense. A drop-down moves collateral into an unrestricted subsidiary and borrows against it; an uptier uses a majority vote to subordinate the non-participating minority.

   Then walk it

   1. Why they happen: a covenant-lite borrower running out of cash with no maintenance default to force a restructuring, plus documents with wide investment, debt and lien baskets. There is capacity and there is a need, so the transaction happens.
   2. Drop-down, sometimes called the J.Crew or trapdoor: use investment and restricted payment capacity to transfer valuable assets — IP, a brand, a business — to an unrestricted subsidiary outside the credit group, then raise new secured debt against those assets. Existing lenders keep their lien on what is left, which is now worth much less.
   3. Uptier, sometimes called the Serta: get a majority of lenders to amend the credit agreement to permit new super-priority debt, then let only that participating majority roll into the new senior tranche at a discount. The minority is left structurally behind, with the same face value and a much worse claim.
   4. Why the majority can do it: most credit agreements allow amendments with 50.1 percent consent for everything except a small list of sacred rights — principal, interest, maturity, pro rata sharing. Priority and lien release often sit outside that list, which is the whole vulnerability.
   5. The consequences you should name: extensive litigation, with courts reaching mixed results on whether these transactions breach the implied covenant of good faith; and a wave of document tightening, with J.Crew blockers, Serta protections and pro rata sharing provisions now standard asks from lenders.
   6. And the lender behaviour it caused: co-operation agreements, where a group of lenders contractually commits not to participate in any such transaction without the others, so no majority can be assembled against them. That is now a standard defensive tool.

   Where candidates lose it

   Describing these as fraud or as a breach. In most cases they were permitted by the document, and that is precisely the point. The sophisticated answer names the amendment threshold that allows it and the blockers lenders now demand in response.

   Expect next

   • How does a J.Crew blocker work?
   • What is a co-operation agreement?
   • Would you buy the paper of a borrower with an aggressive document at a discount?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.