Full Time Analyst Interview - Investment Banking
- High-yield debt tends to have higher interest rates than bank debt since its riskier for the investors.
- High-yield debt interest rates are usually fixed, whereas bank debt interest rates are floating (change based on LIBOR – London interbank offered rate which is the rate banks charge each other for short-term loans).
- High-yield debt has incurrence covenants while bank debt has maintenance covenants, main difference is that incurrence covenants prevent you from doing something (such as selling asset, buying factory, etc) while maintenance covenants require you to maintain a minimum financial performance (for example, the total debt/EBITDA must be below 5x at all times).
- Bank debt is usually amortized (the principal must be paid off over time), whereas with high-yield debt, the entire principal is due at the end (bullet maturity) and early principal repayments are not allowed (the debt investors want to be compensated for their risk and so prefer to keep the debt on the balance sheet for the entire time so they can receive higher interest payments).
- If the PE firm is concerned about the company meeting interest payments and wants a lower-cost option, or they are planning on a major expansion/capex and don’t want to be restricted by incurrence covenants, they might prefer bank debt.
- If the PE firm intends to refinance the debt at some point, don’t believe their returns are too sensitive to interest payments, or if they don’t
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