Private Equity Technicals - Debt Specific?

Took a beating on an interview recently - was not expecting technicals given I'm a 3rd year and HH said it was a behavioral round...unlucky.

Anyways, wondering if anyone has a list or resource for PE technical questions specifically around debt. I understand the concept of debt, and can model LBOs very quickly. However, I'm not 100% comfortable with concepts like how debt trades or convertible debt terms, etc.

I've been mostly a software guy, so not too much debt in a lot of these transactions.

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Comments (38)

  • Analyst 1 in IB - Gen
Oct 8, 2020 - 3:10pm

Apologies as I cannot answer your question, but would it be possible to learn what questions you got - really curious now.

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Oct 8, 2020 - 4:40pm

Spend some time reading bond prospectus and term sheet offerings. That's how you get an understanding of what credit spreads typically sit, what terms/structuring provisions exist, and what debt investors look at.


  • Analyst 1 in IB - Gen
Oct 10, 2020 - 7:00pm

They are public in many cases, just pick any LBO with bonds and google (capital structure, 9Fin, investor website has them) the OM. (Should also be available on BBG).

Oct 12, 2020 - 1:39am

This shouldn't be overlooked. Term sheets are so good if you can actually pay attention to the technical details. For all bankers reading this, if you are on a financing and can get your hand on the legal grid do. It will allow you to see what the negotiating points are and what really matters. 

Further, if your bank is full service take a look at underwriting materials. These are the details that most bankers don't think about, but are very specific at calling out what matters. I remember when I was a first year and asked one of my associates what 7NC5 (5NC3 is also common) meant on a bond offering and he had no idea. Also if you have any decks where you walk clients through capital structure options these are some of the best materials you can get. Finally, if you have corporate banking partners ask them for some of their most interesting terms sheets gives great perspective into TLA, ARR facility structures. Their memos also help with putting your lender cap on.

On pulling term sheets CapIQ is actually really good go look at Disney, Verizon, Broadcom, Qualcomm any company with significant debt etc. (LCD for debt and Renaissance for equity (if you have it, ask your product partners) are even better as they will provided commentary and analysis and details that aren't easily publicly disclosed)

Oct 9, 2020 - 10:04am

hard to really comment as you need to specify what you want to learn

for a starter: it makes probably sense to understand the different debt instruments (TLA, TLB, HY, Mezz, PIK) - what are the characteristics, why might a Company/PE choose a PIK and not a TLB. what are the current debt markets etc.

regarding debt trading: the best resource might just to read distressed-related news at Debtwire/Reorg (if access) - or in other words, follow what Distressed Debt funds are currently buying which might give a sense about the investing rational within the debt world.

curious to know, what exactly the interviewer has asked

Oct 9, 2020 - 4:42pm

Thanks for the reply. Understand the basic characteristics of each and the rationale. I'm more just bad at debt-related math. I legit think I'm slightly dyslexic. Have a hard time keeping track of things like yield vs. interest vs. price. How each interacts, and their implications on LBOs / private equity. Basically, I'm looking for a sort of "primer" on debt math....didn't pay attention enough in college...

Edit: tbh, I missed a really dumb straightforward technical in the start, which is likely what got me dinged. Just haven't reviewed technical interview questions in a while...

The debt question was just phrased in a really weird way: "You have TEV of $150mm, 1st lien of $75, 2nd lien of $50. What does the 2nd lien trade at? Ask anything you don't know or need to know" - I suppose I was supposed to ask for equity value so I could see if the debt traded at par or below. After I said that I frankly didn't understand debt trading that well in this context, he said to think about if the company was acquired for $100mm. So in that case, 2nd lien would trade at 50, since only $25mm remaining. Don't think this is what got me dinged, but did make me realize that I'm not great with debt securities in general beyond an LBO model context.

Oct 9, 2020 - 11:29pm

Oh then that's just knowing how waterfall works. more a RX question than a true LBO-financing question.

In response to your earlier question, I recommend scouring bloomberg if you have a terminal.

You could also try looking online at 8-ks or prospectus on investor relations for your favorite companies. Unless it's a credit fund you won't need to know covenants in too much detail. Usually you should just know what fees are typical for each vanilla tranche, what general rates are, and why you'd pick one over the other (has to do with coupon, covenants, callable, etc.)


  • Analyst 2 in IB - Ind
Oct 10, 2020 - 4:22am

Trying to get your calculation.

EV = 150

1st lien 75

2nd lien 50

Now acquired for 100

Less: first lien: -75

Leaves us 25 to allocate

Why is the 2nd lien now at 50?

  • Analyst 1 in IB - Gen
Oct 10, 2020 - 1:31pm

Did you even have to initially ask for Equity Value? If Ent Value is supposed to represent the true intrinsic fair value of the enterprise, and equity value can be subject to speculation, then as long as Enterprise Value covers the debt in the cap structure wouldnt the debt trade at par, leaving room for equity value to potentially be overvalued if anything?

Oct 10, 2020 - 10:10pm

This isnt really a debt technical IMO. It's an algebra equation. Happy to help with lev fin capital markets knowledge, including structuring the transaction / capital structure w/ revolver, first lien term loan B, second lien, etc., depending on the situation, including terms (pricing, amort, tenor, call protection, financial covenants, etc.)

Indenture (Bonds) = Credit Agreement (Loans)

OM isn't exactly a CIM. OM is legal doc for bonds. Ultimately, bond deals close via legal doc called an Indenture.

LP, CIM, Credit Agreement

CIM (Word) = LP (PPT) for Lev Fin deals

  • CIM & LP - are marketing materials for a lev fin deal.
  • Credit agreement is the legal doc for loan


Credit agreement:…

2L TLB $50 - not actively traded in Secondary

Also - a 2L TLB $50 is only held by a few guys, maybe even 1 lender. It's not actively traded. More-so today, 2L are privately placed prior (not syndicated), whereas the 1st Lien TLB is syndicated via launch of bank meeting to institutional investors. So the question is not capital markets related, but really it's just an algebra equation problem that once you know 1 time, you'll get right every time.

Oct 12, 2020 - 10:31am

Thanks! Very helpful. Curious what you would have asked if you had gotten the question I got: ""You have TEV of $150mm, 1st lien of $75, 2nd lien of $50. What does the 2nd lien trade at? Ask anything you don't know or need to know" 

Was a bit confused what I was supposed to ask in this case to arrive at the answer. After I said I didn't know how to approach, he said think if the company was acquired for $100mm. But not sure how I was supposed to know to ask that?

  • Analyst 1 in IB - Ind
Oct 14, 2020 - 9:37pm

Going to add my 2 cents as I did a stint in CB for 2+ years before IB and recently did an interview at a venture debt shop where I got some similar questions. This is more of just a simple question around understanding of capital structure and waterfall payout if you looked at in a bankruptcy scenario. The shop I talked to talked about how they run different valuation scenarios to see how much cushion they have (i.e. in this case at EV $150 as a second lien holder I have $25 in EV cushion so if I were to run different scenarios and find that it's likely that EV could drop to a value like EV of $100 then as second lien holder I'm more nervous). I would have just answered that second lien at EV $150 is trading at par since if you look at this in a waterfall scenario with an EV of $150 that fully covers second lien holders ($75 first lien plus $50 second lien) and leaves me with cushion of $25. I think he changed the question to $100 to see if it would spark the idea in your head to look at that fact that EV doesn't cover your debt holders so in bankruptcy scenario with EV of $100 first lien debt holders are covered and leaves $25 left over for second lien holders who hold a total of $50 so 50 cents on the dollar. Just how I would think about it. Good luck with the interviews

Oct 13, 2020 - 9:28am

Since second lien is junior to first lien and thus second in line to receiving collateral, I would ask to check if the value of the underlying assets has deteriorated / if the company's situation has changed over time. Since they provide TEV with sufficient info to break down debt and equity, would ask for another point of reference in time in order to have status at T-x and T (current)

  • Analyst 1 in IB-M&A
Dec 23, 2020 - 2:47pm

Adding a quick debt question to this thread because I saw its been active recently. Also, I've searched for other threads on this topic but couldn't dig anything up. Would appreciate if someone wouldn't mind helping me walk through it. Feel free to PM as well.

"You have a company with $500 million of senior debt and $500 million of junior debt. The senior debt has an interest rate of L + 500 and, in default, would recover 70%; the junior debt would recover 30% in default. What should the interest rate be on the junior debt?"

One response I've gathered from another resource is determining the incremental interest that needs to be paid based on loss on default times the probability of default. e.i. 70% loss * 5% probability (assumed) = 350 basis points over the senior debt or L + 850. 

Is this how you would go about answering this question? Any other thoughts?

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