The Leveraged Finance Interview

A candidate will face several different types of interview questions when interviewing for any corporate finance position. There are behavioral questions, career-related questions, case-study questions, brainteasers, basic finance questions and sometimes even team projects or take-home financial modeling projects (this is typical of the very top-tier private equity shops). Furthermore, as leveraged finance is a unique debt function, these teams will most likely have a few basic questions of their own. Some common examples are listed below:

Finally, remember to be true to yourself. Do not forget that the interviewer is searching for a candidate who is genuinely interested in finance and driven to succeed. Since they have been through many interviews and were also probably asked the same questions, interviewers prefer honesty and thoughtfulness, rather than a candidate trying to find the "ideal" answer. And keep in mind that interviewers are searching for interesting, smart, hard-working and nice people to work with, especially since many of them will spend 10+ hours a day working with you.

Leveraged finance questions

(1) Why leveraged finance? Please give me some deal examples that you have read about.
(2) What is meant by EBITDA? How is it calculated?
(3) What is meant by senior debt? Subordinated debt?
(4) What is an LBO? Why are they important to leveraged finance?
(5) What is leverage? Why is it important?

Answer 1: Similar to with "Why investment banking," it is imperative that you explain your interests in the field clearly and succinctly. As mentioned earlier, think through your personality traits, extracurricular activities, and personal interests in order to answer this question. As for deal examples, be sure to read industry publications, keep up with current financial events, and look for different types of transactions. Also, some other important points you might want to note: the transaction volume versus that of a coverage group at an investment bank, the exposure to private equity firms and hedge funds, and possibly your interest in the debt markets.

Answer 2: As discussed earlier, EBITDA is Earnings Before Interest, Depreciation, and Amortization. It is often times used as a proxy for a company's cash flow, which will be used to measure the potential of a company to service debt. Essentially, it is the cash flow generated by a company.

Answer 3: Often discussed as "seniority" and mentioned in prior sections, debt is structured in terms of layers. Senior debt usually refers to the loans and bonds of a company and the "senior" portion of this term often refers to the nature of the debt in relation to other financial instruments. For example, equity is "junior" to debt in the capital structure of a company. This becomes increasingly important when companies are forced into bankruptcy and/or liquidation. Furthermore, the seniority of a financial instrument within a company often times dictates the return that investors will require, in order to sell in the financial markets.

Answer 4: An acronym for "leveraged buyout", the LBO is the bread-and-butter transaction in the world of leveraged 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.

A common misperception is that for most of these questions, there is a right or wrong answer. This is not the case. Most interviewers are mainly trying to assess who you are, whether you would be a good fit for an organization and how much you know about the job, career path, industry and yourself. More than anything, it is important to keep your cool during the interview, always trying to answer a question without giving up and getting frustrated. If you do not know the answer to a question, working around the question and saying, "I don't know that, but I DO know this &" or "I would go here to find that answer," will usually suffice. These interviewers are definitely not expecting you to know everything. Rather, they want you to be creative, resourceful and interested. Subsequently, the absolute worst thing you can do in an interview is say, "I don't know," and give up.

However, in order to be successful, you must absolutely do your homework. Read The Wall Street Journal regularly and be sure to skim the headlines the day of your interview. Scour the company's web site, making note of any recent major headlines. Showing a genuine interest in the firm is much easier when you can ask questions about a recent deal or talk about a recent organizational announcement. This also gives you a chance to bond with your interviewer. After the interview is over, write a thank you e-mail or even a handwritten note to all of your interviewers. Phone calls are cumbersome, so avoid them. A simple "thank you" e-mail will not go unnoticed.