Case study question

robbie321's picture
Rank: Chimp | 6

Hi guys - I have an upcoming interview with a credit fund with a case study. A friend of mine that works at this fund told me the case study is essentially a presentation of a company where there is a borrowing need, lets say for a LBO, and you need to decide which security to invest in with the options being 1st lien, 2nd lien, or equity.

I have no problem building out a LBO model / calculating IRRs but I'm interested to hear people's thoughts on how you decide between the various securities (i.e. 1L vs the 2L). I have a general idea but again, hearing others thoughts would be very helpful as I prepare.

Thanks in advance!

Comments (2)

Most Helpful
Aug 21, 2019

Well, as a credit investor, you want your principal to be paid back in full along with interest. You're more concerned with protecting your downside. There is no upside per se as is the case with equity investing. So as you consider the different debt tranches, see which debt tranche (t1 or t2) offers the most compelling risk / reward profile. For eg, if you're investing in a retail company (or any industry) where t1 is trading at 8% ytM and t2 at 16% with no chance of company being able to pay off t2, then you should be more inclined towards t1 despite the lower yield. Other important things include how is your debt investment going to be protected (level and quality of collateral, restrictive covenants in place). I suggest when you Get the case, make 2 scenarios - base and downside. Downside case should be really v. Limited to no growth as the purpose of that scenario should be to illustrate that even if shit hits the fan, you will still get your money back.
Hope this helps

    • 2
Sep 4, 2019