Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
Debt & Leverage
5 conceptsDebt capacity from lender tests
Lenders do not ask how much debt a sponsor wants. They run three tests and lend the smallest answer. Leverage caps debt at a multiple of EBITDA. Coverage caps it at whatever the business can pay interest on with a cushion to spare — which makes it a test of the interest rate as much as the business. Loan-to-value caps it at a share of what the company is worth, so that there is equity underneath the loan. In cheap-money years the leverage test binds; when rates rise the coverage test takes over, and debt capacity falls even though EBITDA has not moved.
Unitranche versus senior plus mezzanine
A buyout can be financed in layers — cheap senior debt on top, expensive mezzanine underneath — or with a single unitranche loan that covers the same total at one blended rate. The layered structure is usually cheaper on paper, because the senior lender is paid only for senior risk. The unitranche costs more per dollar but comes from one lender, closes faster, has one set of covenants and no intercreditor negotiation, and often lets the borrower defer part of the interest. The comparison is a blended-rate calculation; the decision is about certainty, speed and flexibility, and how much the sponsor will pay for them.
Covenant headroom
A leverage covenant says debt may not exceed some multiple of EBITDA. The sponsor cares less about the multiple than about the cushion: how far EBITDA can fall before the test fails. That cushion is set at closing by the gap between actual and permitted leverage, and it moves every year — up as debt is repaid and EBITDA grows, down as the covenant steps down on schedule. A breach hands the lenders control of the conversation. Reading the cushion, and how it changes when the covenant tightens, is the difference between a comfortable capital structure and one that is a bad quarter from default.
PIK toggle and accreting balances
Payment-in-kind interest is not paid; it is added to the loan. That keeps cash in the business, which is the point — but next year’s coupon is charged on the larger balance, so the note compounds. Compare it to paying the same coupon in cash: cash-pay drains free cash flow that would have repaid senior debt, so total debt at exit is higher than if there were no coupon at all, but only by the simple sum of the coupons. PIK costs more than that, by exactly the interest-on-interest. The toggle lets the borrower choose each period, which is why lenders price it and sponsors use it when cash is tight and growth is expected.
Refinancing breakeven
Refinancing swaps an expensive loan for a cheaper one, but the swap is not free: the new lender charges an arrangement fee and the old lender often charges a premium to be repaid early. So the sponsor pays a lump sum today to save a stream of interest tomorrow, and the question is how long the stream has to run before it has covered the lump sum. Run it backwards and you get the rate the new loan must beat for the deal to pay off before the planned exit — which is the number the sponsor takes into the negotiation.