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. 076What is the difference between an incurrence covenant and a maintenance covenant?Covenants and documentationIntermediatephone / first roundLeveraged financePrivate credit

   Say this

   A maintenance covenant is tested every quarter whether or not the borrower does anything — miss it and you are in default. An incurrence covenant is only tested when the borrower takes an action, like raising debt or paying a dividend. Fail an incurrence test and you simply cannot do the thing; you are not in breach.

   Then walk it

   1. Maintenance: net leverage below 5 times, tested each quarter on the compliance certificate. A bad quarter alone puts you in default, which gives lenders the right to accelerate or, more usefully, to demand a repricing, more security or an equity cure.
   2. Incurrence: you may incur additional debt only if pro forma leverage is below 4 times. If it is 4.2, you cannot issue. Nothing has gone wrong; a door is just shut.
   3. Who gets which: bank term loan As and revolvers carry maintenance tests, because banks want the early seat at the table. High yield bonds are incurrence-only, always have been, because a dispersed bondholder base cannot manage a workout. Term Loan Bs used to have maintenance tests and now mostly do not.
   4. The commercial consequence is timing of information and control. A maintenance covenant surfaces stress two or three quarters earlier, when there is still enterprise value to negotiate over. Incurrence-only means lenders often find out when the borrower runs out of cash.
   5. Which is why recoveries have been weakening. Later detection means more value has already leaked, and recent first lien recoveries have come in materially below the historic 70 percent average.
   6. Two related features to name: an equity cure, letting the sponsor inject cash to fix a maintenance breach, usually limited in number and amount; and a springing covenant, which converts a revolver into a maintenance-tested facility only when drawings exceed a threshold.

   Where candidates lose it

   Saying incurrence covenants are 'weaker' without explaining the mechanism. The point is not strength, it is timing — maintenance tests give early warning and negotiating leverage, incurrence tests only block actions. Link it to recovery rates and the answer lands.

   Expect next

   • What is an equity cure?
   • Why do recoveries fall when maintenance covenants disappear?
   • Which would you insist on as a private credit lender?
2. 077What is covenant-lite, and what is a springing covenant?Covenants and documentationHardtechnicalLeveraged financePrivate credit

   Say this

   Covenant-lite means a term loan with no maintenance financial covenant — it has incurrence covenants like a bond. A springing covenant is the compromise: the revolver carries a leverage or coverage test that only applies if revolver utilisation exceeds a threshold, typically 35 to 40 percent.

   Then walk it

   1. What covenant-lite does not mean: it does not mean no covenants. Negative covenants restricting debt, liens, asset sales, restricted payments and affiliate transactions all remain. What is gone is the quarterly financial test.
   2. The springing mechanic: the revolver, which is bank-held, gets a test that springs into existence when drawings exceed the threshold. Term loan lenders get no benefit from it, which is the point — banks protected themselves and institutional lenders did not.
   3. What actually changed in practice: the early warning system. Under a maintenance test, a deteriorating borrower comes to lenders in quarter two. Covenant-lite, they arrive when liquidity runs out, often several quarters later, with less enterprise value left to divide.
   4. It also enabled the liability management era. Without a maintenance test there is no default to trigger, so a struggling borrower has time and room to use the permissive baskets — drop-downs, uptiers, priming transactions — before lenders can act.
   5. The genuinely fair counterargument: maintenance defaults sometimes forced restructurings on businesses that would have recovered, and cov-lite loans have not defaulted at higher rates than covenanted ones. The damage shows up in recovery severity, not default frequency.
   6. So for a lender the practical response is to substitute monitoring for covenants: monthly reporting where you can get it, liquidity tracking, and very close reading of the baskets and the EBITDA definition. And to price the documentation, not just the credit.

   Where candidates lose it

   Saying cov-lite means there are no covenants. The negative covenants are still there and they are what get exploited. Also, the sophisticated point is that cov-lite shows up in recovery severity rather than default frequency — that is the distinction interviewers reward.

   Expect next

   • At what utilisation does a springing covenant typically trigger?
   • So does cov-lite increase defaults or just worsen recoveries?
   • How do you monitor a cov-lite credit?
3. 078Explain call protection — non-call periods, the call schedule and a make-whole.Covenants and documentationIntermediatetechnicalLeveraged financeFixed income asset management

   Say this

   Call protection is what stops an issuer refinancing away a bond the moment it gets cheaper. High yield uses a hard non-call period then a declining premium schedule; investment grade uses a make-whole, which requires the issuer to pay the present value of all remaining cash flows, so calling is almost never economic.

   Then walk it

   1. High yield structure on a typical 7-year deal: non-call 3, then callable at 103 in year 4, 101.5 in year 5, and par thereafter. The premium usually starts at half the coupon and steps down. NC2 or NC1 on a 5-year is common for stronger credits.
   2. Alongside it, an equity clawback letting the issuer redeem up to 35 or 40 percent at par plus the coupon out of IPO proceeds, and a 10 percent per year at 103 carve-out on many recent deals. Those carve-outs erode the protection and are worth reading for.
   3. Make-whole: the redemption price is the present value of all remaining coupons and principal discounted at the relevant Treasury yield plus a small spread, usually 25 to 50 basis points. Because the discount rate is below the bond's own yield, the make-whole price is above market, so the option is out of the money by construction.
   4. Which is why investment grade issuers almost never call. They tender instead, which is a market transaction at a negotiated price rather than exercising a contractual right.
   5. Loans are the opposite extreme: prepayable at par, with at most a 101 soft call for six to twelve months, which only applies to a repricing refinancing. That prepayability is a big part of why sponsors like loans.
   6. The investor consequence to state: call protection is what you are paid for in the spread. A bond with weak call protection and generous carve-outs should trade wider than one without, and a portfolio manager who does not price the call schedule is giving away option value.

   Where candidates lose it

   Describing a make-whole as just 'a penalty'. It is a present value calculation designed to make the call uneconomic, and saying why — the discount rate is below the bond's yield — is the technical point. Also do not forget that loans have essentially no call protection, because that contrast is the commercial insight.

   Expect next

   • Why is a make-whole call almost never exercised?
   • What is an equity clawback?
   • How would you value the call option in a high yield bond?
4. 079What are restricted payments, and what is a builder basket?Covenants and documentationHardsuperdayLeveraged financePrivate credit

   Say this

   Restricted payments are transfers of value out of the credit group — dividends, share buybacks, payments on junior debt, and investments in unrestricted subsidiaries. The builder basket is a growing allowance for them, usually 50 percent of cumulative consolidated net income since the deal closed, which means the more the company earns the more it may leak out.

   Then walk it

   1. Why lenders care: your credit support is the enterprise value inside the restricted group. Anything leaving it reduces your recovery, so the restricted payments covenant is the ring fence around your collateral.
   2. The permission architecture, and you should name all four layers: the builder basket; a fixed general basket, often set as the greater of a dollar amount and a percentage of EBITDA, which means it grows as EBITDA grows; a ratio-based basket permitting unlimited payments if leverage is below a threshold; and specific carve-outs for things like management equity buybacks.
   3. The builder basket mechanics: typically 50 percent of cumulative consolidated net income from the closing date, sometimes with the option of 100 percent of a growth-based metric instead. It is cumulative and it never resets, so in a long hold it can become very large.
   4. The abuse route that matters most is the investment basket into unrestricted subsidiaries. Move valuable assets — intellectual property, a brand, a business line — into an unrestricted subsidiary using restricted payment or investment capacity, and it is outside the credit group. Then borrow against it. That is the drop-down transaction, and J.Crew is the case everyone cites.
   5. So the analysis I would actually do: total up every basket, express it as a multiple of EBITDA, and ask what the borrower could legally take out of my collateral tomorrow. On aggressive 2021-vintage documents that number has been several turns of EBITDA.
   6. And check the EBITDA definition, because every basket sized off EBITDA inherits the add-backs. A generous EBITDA definition multiplies every single basket in the document simultaneously.

   Where candidates lose it

   Defining restricted payments as just dividends. The dangerous item is investments in unrestricted subsidiaries, because that is how assets leave the collateral pool. If you cannot connect restricted payment capacity to the J.Crew drop-down, you have missed why this covenant is the one credit funds read first.

   Expect next

   • How did the J.Crew transaction actually work?
   • How would you size total leakage capacity?
   • Why does the EBITDA definition amplify every basket?
5. 080What is an EBITDA add-back, and why do lenders fight so hard over the definition?Covenants and documentationHardsuperdayLeveraged financePrivate credit

   Say this

   An add-back is an adjustment that increases covenant EBITDA above reported EBITDA — restructuring costs, transaction fees, run-rate synergies, unrealised cost savings. Lenders fight over it because every ratio in the document runs off EBITDA, so a generous definition simultaneously lowers reported leverage, widens every basket and expands covenant headroom.

   Then walk it

   1. The legitimate ones are uncontroversial: genuinely non-recurring restructuring charges, one-off transaction expenses, and non-cash items like stock compensation and impairments.
   2. The contentious ones are forward-looking: pro forma run-rate synergies and cost savings from actions not yet taken. These are projections written into a contract as if they were facts, often with an 18 to 24 month realisation window and sometimes uncapped.
   3. The leverage arithmetic makes the stakes obvious. Reported EBITDA 100, debt 500, so 5 times. Add back 25 of synergies and leverage becomes 4 times on the same debt. Nothing changed in the business and a full turn of leverage disappeared.
   4. Then it compounds, because every basket sized as a percentage of EBITDA grows too — general debt baskets, restricted payment baskets, investment baskets, incurrence ratios. One definition change loosens the whole document at once.
   5. What lenders negotiate for: a hard cap on add-backs, commonly 20 to 25 percent of EBITDA; a shorter realisation period; a requirement that actions be identified and steps taken; and no double-counting against actual results once savings arrive.
   6. The single best diagnostic in leveraged credit: track reported EBITDA against covenant EBITDA quarter by quarter. A widening gap, especially where synergies keep being added but reported EBITDA does not grow, is the clearest early warning there is.

   Where candidates lose it

   Treating add-backs as an accounting curiosity. They are a leverage-reduction device, and the point that clinches the answer is that a generous EBITDA definition loosens every ratio and every basket in the document at the same time. Give the 5 times to 4 times arithmetic out loud.

   Expect next

   • What cap on add-backs would you insist on?
   • How do you test whether synergies arrived?
   • What does a widening reported-to-covenant EBITDA gap tell you?

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.