The Leveraged Finance or “LevFin” group is not a big deal; they just happen to close big deals.
And it’s not just because of those big deals; people also think that Leveraged Finance is one of the best groups for getting out of private equity.
Credit checks are part of your job, and you may get more deal experience than bankers in industry or M&A.
Before you decide that Leveraged Finance is the best group ever, you should read the small print: Table Of Contents
With leveraged finance playing a crucial role in enabling companies to fund expansions, acquisitions, and other strategic moves, there is growing demand for finance professionals skilled in this specialized domain.
However the technical interview for leveraged finance roles can seem intimidating for even seasoned finance veterans. You need to demonstrate expertise on topics like financial modeling debt structuring, credit analysis, and risk management.
In this comprehensive guide, I’ll provide an insider’s perspective on mastering leveraged finance interview questions and landing your dream job.
Why Technical Questions Matter in Leveraged Finance Interviews
Leveraged finance interviews aim to assess the following key abilities:
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Financial modeling – Can you build flexible models to analyze different debt structures and outcomes? Strong Excel skills are vital
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Debt structuring – Do you understand seniority covenants call protection and how to optimize financing? Knowledge of instruments like high-yield bonds and leveraged loans is key.
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Credit analysis – Can you comprehensively assess a company’s ability to service debt through ratio analysis, cash flow forecasting, etc?
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Risk management – Mitigating risk exposure is crucial. Interviewers will probe your thinking on managing risks.
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Deal execution – Leveraged deals involve complex negotiations. Experience driving deals to closure will be valued.
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Communication skills – Explaining analyses, risks, and strategies clearly and concisely is critical.
With preparation, you can demonstrate expertise in each area confidently. Let’s look at some examples of technical questions and how to structure winning responses.
10 Common Leveraged Finance Interview Questions and Sample Answers
Here are 10 frequent technical questions, with tips to ace your responses:
1. Why are financial maintenance covenants important in leveraged finance?
Highlight how covenants mitigate lender risk by enforcing discipline on the borrower’s financial policies throughout the loan term. Discuss requiring regular reporting and prescribing limits on leverage and cash flow coverage ratios. Flag their role in triggering technical default if not maintained.
2. What are some key credit ratios you analyze when assessing a company for a leveraged loan?
Discuss ratios like Debt/EBITDA, Interest Coverage, Debt/Capital, Current Ratio, etc. Explain their implications in evaluating leverage capacity, cash generation, liquidity, and overall credit health. Share ideal threshold ranges.
3. What factors should be considered when determining the appropriate leverage level for a corporate borrower?
Outline qualitative factors like business model, competitive position, growth trajectory, management strength, and sensitivity to economic cycles. Also highlight quantitative metrics like cash flow volatility, capital intensity, and ability to deleverage organically.
4. How would you structure a $500 million leveraged loan for an LBO transaction?
Describe typical components like a revolving credit facility, term loan A, term loan B, high yield bonds, etc. Explain rationale for ratios between debt types based on cost, repayment schedule and risk. Discuss ideal covenant package.
5. How would you hedge the interest rate risk on a floating rate leveraged loan?
Discuss using fixed-floating interest rate swaps to synthetically convert floating rate exposure to fixed rates for predictability. Explain mechanics of swaps and the need to match notional amount and duration to the underlying loan.
6. What are some early warning indicators that a borrower may be struggling to meet debt obligations?
Flag trends like declining revenues, compressed margins, spiking leverage, weakening ratios, delays in financial reporting, reliance on short-term fixes like asset sales or liquidity withdrawals. Emphasize need for proactive monitoring.
7. How would you mitigate FX risk for a European company raising leveraged debt in U.S. dollars?
Describe hedging currency exposure via forwards, swaps or options to match revenue cash flows. Discuss balancing cost vs risk protection in selecting hedging products. Highlight importance of timing, tenor alignment and monitoring.
8. What leverage metrics would concern you most in a highly cyclical industry like airlines?
Emphasize metrics that reflect ability to endure prolonged industry downturns like Debt/EBITDAR, EBITDAR/Interest Expense, and operating lease adjustments. Discuss appropriate leverage ceilings and need for ample liquidity cushions.
9. What are some differences in assessing leverage capacity for an asset-light SaaS company vs. an airline?
Contrast relatively stable, recurring cash generation of SaaS enabling higher sustainable leverage vs. the volatile, capital intensive nature of airlines meriting conservative leverage. Tailor analysis to each industry’s operating model and cash flow profile.
10. How could you accelerate deleveraging post-LBO if the target company underperforms plan?
Discuss options like rights offerings, equity clawbacks, asset sales, amending debt covenants for flexibility, potentially exchanging debt for preferred stock. Demonstrate creative problem-solving and mitigation skills.
This overview of common technical questions equips you to demonstrate your expertise and thought leadership. Remember to use specific examples and data to support your responses.
Here are some final tips for leveraged finance interview success:
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Research the bank’s portfolio and strategies to tailor your messaging
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Quantify your achievements and past deal experience
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Ask for clarification politely if needed before answering
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Time your responses judiciously to cover depth vs. breadth
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Explain your thinking – interviewers want your logic and problem-solving process
With rigorous preparation, you can stand out from the competition. Let your experience, passion, and expertise shine through! You’ve got this.
The Leveraged Finance Job Description and Leveraged Finance vs DCM
LevFin is a lot like what you do in Debt Capital Markets (DCM): you give companies strategic advice on how to borrow money.
That means making pitches to current and potential clients, issuing debt for clients, and working with other groups to give them important market information and transaction case studies.
There is a big difference between the two: DCM focuses on issuing investment-grade debt that is used for everyday things, while LevFin focuses on issuing below-investment-grade debt (high-yield bonds or “leveraged loans”) that are often used to fund takeovers, control purchases, and other deals.
“Below-investment-grade” means anything with a Ba1/BB+ credit rating or lower.
These companies are usually riskier than “blue-chip companies” because their results aren’t as stable, they take on more debt, and they have a higher chance of going bankrupt.
As a result, their debt issuances must offer higher yields than those of investment-grade companies.
Because of this difference, most of your LevFin clients will be businesses or private equity firms, not governments, agencies, or supra-nationals.
Common uses of debt for LevFin clients include:
- Leveraged buyouts: A private equity firm buys a business with a mix of cash and debt, fixes it up, and then sells it again. It’s house-flipping on a much larger scale.
- Bringing together
- Capital Expenditures: A company may take out a loan to build a new factory or create a new asset that isn’t necessary for its regular business.
- Leveraged Recapitalizations: The client wants to borrow money to buy back shares or pay dividends.
- Refinancings: When a company’s debt is about to mature, it almost always takes out new debt to pay off the old debt and replace it.
In Leveraged Finance, the work that needs to be done is often more complex than in DCM because each deal is different.
You need to know not only how businesses work and how the credit markets work, but also how big deals affect businesses and their credit scores.
It’s more about presenting custom solutions to clients rather than offering the same products with slight variations.
Market Conditions / Update Presentations:
You tell the potential client about recent issues, net flows into high-yield and leveraged-loan mutual funds, current interest rates, issuance volumes, and other market statistics in these presentations.
The goal is to say, “Now is a great time to pursue a transaction!”
After all, if you are a banker, any time is a great time to pursue a transaction.
Here’s an example from Barclays:
With these, once again, you present evidence that now is the right time to pursue a deal.
In this case, it’s because other, similar companies have raised debt at similar terms and had successful offerings.
Common information includes the transaction value, multiples, credit ratings, and debt terms (interest rates, yields, original issue discount, LIBOR floor, call premiums, etc.).
Here are a few examples:
Like the documents described in the DCM article, you’ll also write a lot of memos in Leveraged Finance. Their main purpose is to provide a background for transactions.
You could talk about your client’s industry, its growth prospects, its products and services, its competitors, the majority of its customers, and the percentage of its revenue that comes from repeat sales.
You’ll also describe the transaction itself, including a Sources & Uses schedule, a capitalization table, post-deal credit stats and ratios, and the operating metrics and credit stats/ratios for comparable companies.
You could use these memos to get approval from your bank’s credit committee, or you could use them to help the sales team pitch new syndicated offerings to institutional investors outside of your bank.
Another thing you could do is look at an existing loan, carefully read its terms, and file an “amendment” to change those terms for a client.
This change is usually made when a business needs more time to pay back a loan. In this case, you could offer lenders a higher interest rate in exchange for more years until the loan is paid off.
Changes to credit are not full transactions like leveraged buyouts or M&A deals are.
The DCM article went over the important terms of debt issues, so read that for a summary.
In most cases, you’ll be working with high-yield bonds and leveraged loans in LevFin.
“High-yield bonds” is a broad category, but it generally includes junior debt instruments that have fixed coupons (e. g. , 7. 0% rather than L+200 bps) and incurrence covenants rather than maintenance covenants.
“High-yield” refers to any below-investment-grade issuance that offers higher interest rates as a result of higher default risk.
Different types of notes fall into this group, including Senior Unsecured Notes, Unsecured Notes, Subordinated Notes, and Mezzanine. Each has some small differences.
For instance, equity warrants are sometimes attached to mezzanine, which let investors get a small share of company equity when the deal ends.
High-yield bonds and leveraged loans are not the same. The coupon on leveraged loans usually changes, they have maintenance covenants, they are backed by assets, and there may be some amortization.
They’re like term loans, but traditional term loans have lower interest rates and are only given to investment-grade companies with little debt.
In Leveraged Finance, the terms are much more different than in Debt Capital Markets.
For instance, you can’t just offer new debt with slightly different terms if a company with a lot of debt wants to refinance but might not be able to make its interest payments in cash.
Instead, you could look at the yield that investors are getting now and suggest a very different structure that would still give them the same yield.
For instance, you could offer a new loan with a lower interest rate, some Paid-in-Kind (PIK) interest that builds up on the loan principal, and a small amount of equity when the loan is paid off.
It will have a lower annualized cash yield, but lenders may get the same IRR (if the company stays in business).
You would be unlikely to propose this type of deal in DCM because investment-grade bonds do not have PIK Interest or equity warrants.
Investment Banking Mock Interview: What is an LBO?
What is leverage in finance?
Answer 5: Understandably, leverage is the key concept in leveraged finance. The term leverage refers to a ratio of the amount of total debt to EBITDA that a firm currently has. This ratio helps to explain a company’s financial stability, relative to its peers.
What is JP Morgan leveraged finance interview prep?
J.P. Morgan Leveraged Finance Interview Prep. An interest rate can be fixed at a specific percentage or be linked to LIBOR. For example, LIBOR + 400 means the LIBOR Rate plus 4%. IF interest rates are falling, debt investors prefer fixed rates, but if they’re rising, they prefer floating rates. J.P. Morgan Leveraged Finance Interview Prep.
Is leveraged finance a good investment?
It’s not just because of those big deals, though; there’s also the perception that Leveraged Finance is one of the best groups for exit opportunities into private equity. You do credit analysis, you work on leveraged buyouts, and you might get more deal experience than bankers in industry or M&A groups. What’s not to love?
What is a leveraged loan?
As a result, most term loans and revolvers in the leveraged loan market are syndicated to institutional investors like hedge funds, CLOs, mutual funds and insurance companies (and some banks). Leveraged loans are usually secured by the company’s collateral and occupy the safest space for a lender in the company’s capital structure.
