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. 039Explain notching and structural subordination.Credit analysis and ratingsIntermediatesuperdayRating agenciesCredit research

   Say this

   Notching is the agency's adjustment from the issuer's corporate family rating to a specific instrument, reflecting where that instrument sits in priority and what it would recover. Structural subordination is one reason for it: debt at a holding company ranks behind all the liabilities of the subsidiaries that actually own the assets, even if it is contractually senior.

   Then walk it

   1. Start with the family rating, which is a view on probability of default for the whole group. Then each instrument is notched up or down for expected recovery. Senior secured usually up a notch or two, senior unsecured at the family level, subordinated and PIK down one to three.
   2. Contractual subordination is the obvious kind: the document says you get paid after the senior debt. Structural subordination is quieter and often larger.
   3. The mechanism: a holdco owns equity in opcos. Equity is the residual claim, so holdco creditors are only paid from what is left after every opco creditor, trade payable and lease obligation is satisfied. You are effectively behind liabilities you never underwrote.
   4. That is why lenders demand upstream guarantees and share pledges from the operating companies. A guaranteed holdco note ranks alongside opco debt; an unguaranteed one does not, and the rating and pricing gap between the two can be 150 basis points or more.
   5. A concrete shape: group at 3 times consolidated leverage, but 2.5 turns sits at the opcos and 0.5 at the holdco. Holdco leverage looks tiny and its effective leverage is 3 times, because it is behind everything.
   6. The check to run every time: which legal entity is the borrower, which entities guarantee, where do the assets and cash sit, and are there non-guarantor subsidiaries. Unrestricted subsidiaries are the modern version of this problem, because assets can be moved into them and out of your reach.

   Where candidates lose it

   Explaining contractual subordination and calling it structural. They are different, and the structural version is the one that surprises people, because the holdco note can look senior on paper and recover almost nothing. Always ask where the assets sit.

   Expect next

   • How would you fix structural subordination as a lender?
   • What is an unrestricted subsidiary?
   • How much is an upstream guarantee worth in spread terms?
3. 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.

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.