Interview Help - Structuring Fundamentals
Hey Chimps - long time lurker, first time poster. Need some help with prepping for Lower MM/Upper MM private credit interviews.
In speaking with PC associates, I've been advised to be prepared to answer questions on the fundamentals of structuring (e.g., how much leverage would you put on this business, where would you set the leverage covenants, what would you open up pricing at, etc.). I've asked the VPs on my current team (Upper MM/Mid-Corporate CB) how they think about structuring but their answers do not seem to be applicable in the context of Lower MM private credit given that my current team lends to larger companies with publicly available comp sets. In addition, I haven't had much luck finding resources online (my assumption is that it varies widely based on who you ask).
Acknowledging that this is a broad topic with multiple interpretations... are there any materials, rules of thumb, concepts, etc. that I can use to deepen my understanding of how to structure a senior credit facility? Namely looking for the analysis and/or logic behind how to size a facility (e.g., 3.0x leverage vs 5.0x leverage) and how to competitively price a facility so that I'm well equipped to answer the question and defend my answer.
Ah, you're diving into the jungle of private credit, my friend! Here's a bunch of bananas to help you swing through the trees of structuring fundamentals. Based on the most helpful WSO content, let's peel back the layers:
Leverage Levels: When considering how much leverage to put on a business, you'll want to look at a few key factors:
Leverage Covenants: Setting leverage covenants is a bit of an art and a science. You'll want to ensure the covenants provide enough room for the business to operate without tripping them accidentally but are tight enough to protect the lender. Consider:
Pricing: Competitive pricing is influenced by:
To defend your answer, you'll need to show that you've considered all these factors and can articulate why they lead you to your specific structure and pricing. Remember, the credit docs are your treasure map here, guiding you through the terrain of covenants, collateral, and cash flows.
For more in-depth analysis, you might want to check out the WSO Networking Guide or the Investment Banking Prep Pack for some golden nuggets on structuring deals. These resources can give you a more granular view of the logic behind different structuring decisions.
Good luck, and may your credit facilities be ever in your favor!
Sources: https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, How to Prepare for Restructuring Technical Questions, Why You Should Consider Restructuring – Common Misconceptions/Insight on RX Groups
Perhaps not the most fulfilling answer, however the appropriate structure depends on the type of business you're looking at.
When based off a company's cash flow, an asset-light business services company with high margins in a high growth industry (Company A) typically is able to bear a substantially higher debt package than a CapEx heavy business in a low growth/mature market (Company B), given that A is able to deleverage rapidly as EBITDA grows significantly over the coming years while cash generation is solid.
Also worth noting that there has been a shift in risk focus - whereby ICs increasingly focus their attention on a company's Debt Service Coverage Ratio given the increased interest cost, while this was less of a topic in the low interest rate environment. So perhaps the profile of Company A would suggest it can easily take on a 5x structure, however in the high rate environment it might be the case that A's cash flow available for interest payments gets a little too tight in the initial years.
Lastly, if the structuring is related to an LBO you should keep an eye on the multiple at which the company is being bought as the equity cheque would give some comfort on expected sponsor behaviour when things go south. Will they buy Company A at 15x EV/EBITDA? Great, 10x EBITDA skin in the game on sponsor's side will help incentivize them to turn the business around. Did they buy it at 7x? Then they might consider handing over the keys if things get rough given the relatively limited exposure they have.
A long but definitely non exhaustive answer - hope it helps and good luck with the interviews!
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