Private Credit Interview Questions and Answers: How to Merge Corporate Banking, Capital Markets, and LBO Modeling

Private credit has become a “hot” area lately, and we’ve received many frantic questions about what to expect in interviews and case studies.

Previous articles on direct lending, mezzanine funds, corporate banking, DCM, and LevFin have covered parts of this topic, but I wanted to consolidate everything here and explain some of the nuances.

If you already know the industry and what to expect in the recruiting process, feel free to skip to the private credit interview questions and answers.

But I’ll start with some background information for everyone else:

What is Private Credit? And Why Has It Taken Off?

Private credit refers to lending between a non-bank lender, such as an asset manager or investment fund, and a company.

It’s an expansive term that includes areas such as direct lending and mezzanine:

[Credit: Marquette Associates]

This image doesn’t include everything; areas like “special situations debt” (similar to distressed debt) and private collateralized loan obligations (CLOs) should also be there.

Private credit has exploded since the 2008 financial crisis, as new regulations and capital requirements drove many large banks away from their lending activities for middle-market companies.

Just the direct lending segment alone grew from $100 billion in AUM in 2014 to nearly $800 billion worldwide in 2023 (~23% annualized growth rate):

[Credit: Credit Sights]

Private credit benefits everyone except the large banks:

• Private Equity and Other Investment Firms – They have found it increasingly difficult to earn high returns in traditional private equity, so they’ve allocated more resources to credit. Sure, returns are lower, but they’re also more predictable and easier to pitch. Think of it like lowering your dating standards because you’re getting older and no longer have time to pursue the shiniest fish in the sea.
• Borrowers – Smaller and highly leveraged companies can often get private credit deals done more quickly with more pricing and “deal close” certainty. They may be able to get higher leverage and more customized terms as well – at the cost of higher interest rates.
• Limited Partners – Private credit funds tend to charge lower fees than traditional PE firms; a 1% management fee and 15% performance fee might be reasonable, meaning LPs pay less for solid returns. And the hurdle rates still exist, giving LPs some downside protection.

The Private Credit Recruiting Process

The same on-cycle and off-cycle recruiting processes in private equity also exist in private credit, but off-cycle recruiting represents a much higher percentage of the total.

The private equity mega-funds with huge credit arms (Ares, Apollo, etc.) all use on-cycle recruiting, but many smaller/mid-sized private credit groups are more flexible.

To be competitive for private credit roles, you should ideally come from an investment banking background with significant debt experience (e.g., LevFin, Restructuring, or an industry group that does a lot of debt deals, such as industrials).

Groups such as corporate banking, commercial banking, fixed income research, and credit rating agencies are in the “maybe” category.

In theory, you have the required credit analysis and deal/client skills, but you may not be fully competitive with IB candidates.

So, it’s almost always in your best interest to gain deal experience in IB before trying to make this move.

And if you have no credit experience (e.g., a venture capital or consulting background), you don’t have a realistic chance at these roles.

In many buy-side interviews, the main interview question categories are fit/background, markets/investments, firms/processes, deal/client, technical, and case studies.

For private credit, the fit/background, deal/client, technical, and “case study” categories are important, but the firm/process and market/investment ones are less critical.

Compared with areas like VC and PE, private credit is more of an execution-focused role, so you are less likely to get into discussions about market trends or interesting companies to invest in.

It’s also much harder to find information on specific private credit deals, which may limit discussions about the firm’s portfolio and track record.

These questions could still come up, but you should expect interviewers to focus on your background, previous deals, technical questions, and case studies.

Private Credit Interview Questions: Fit/Behavioral

The usual questions are all here, but you need to answer them with a credit spin:

Q: Walk me through your resume.

A: See our guide and examples for the “Walk me through your resume” question and the article on how to walk through your resume in buy-side interviews.

For PC, make your story about how you worked on one credit-related deal, became more interested over time, and are now drawn to credit over IB/PE.

For example, PC appeals to you because of the critical thinking required to evaluate the downside risk in deals; you use much less of this in IB since it’s a sales role.

But unlike in PE, where you do deep dives on deals that could take months, private credit usually involves a “moderate depth” evaluation because you execute far more deals.

So, it appeals to you because of the industry and deal type variety and the ability to think critically about transactions without going “too far down the rabbit hole.”

Q: Why private credit rather than private equity or hedge funds?

A: See above. You like the downside focus in credit and the fact that due diligence is more useful for evaluating these downside cases.

Also, you tend to work on and close more deals than in IB or PE, go into “moderate depth” on each one, and have the flexibility to invest in different parts of the capital structure.

It’s not like PE where each LBO deal is a “yes” or a “no” – in private credit, you could invest in the 2^nd lien issuance but not the 1^st lien.

Compared with hedge funds, you like the fact that private credit investing is longer-term and not quite as catalyst-driven.

You understand the need to monitor companies over time, but you prefer to invest based on 3-7-year time frames rather than 6-12-month ones.

Q: What are your strengths and weaknesses?

A: Yes, there’s a full guide to this one as well.

Since PC is an execution-focused role, it’s best to cite points like your technical/analytical skills or ability to review information and quickly make decisions for your strengths.

Multi-tasking and juggling multiple assignments are also important.

For your weaknesses, you can probably get away with admitting that you’re not the best at sourcing deals, pitching, or giving public presentations since you won’t do these much in junior-level PC roles.

But do not say anything about your general “communication skills” because these are important at all levels.

Q: Why our firm?

A: It’s difficult to find information on specific private credit deals, so make this one about the people you’ve met there or recent news/strategies the firm has announced, such as a new fund they raised or a new focus on a certain market.

You can also link part of this to your “Why private credit?” answer and briefly remind them why you want to do PC rather than PE, IB, etc.

Private Credit Interview Questions: “Generalist” Technical Questions with a Credit Spin

Since most candidates come from investment banking backgrounds, virtually anything in IB interviews could also come up here.

That said, you are probably less likely to get questions about valuation and M&A/merger models because these are rarely the core focus in credit.

You should know the basics, but they’re more likely to ask about accounting, 3-statement modeling, debt schedules, and LBO models.

Here are a few example questions with a “credit” spin:

Q: Walk me through how to calculate FCF from EBITDA without a full 3-statement model.

A: See our EBITDA to FCF tutorial.

In short, FCF = EBITDA – Net Interest Expense – Taxes +/- Other Non-Cash Adjustments +/- Change in Working Capital – CapEx.

This basic definition changes for different types of FCF, such as Unlevered Free Cash Flow and Levered Free Cash Flow.

Also, it’s more complicated under IFRS because you need to clarify whether they want you to deduct or exclude/add back the full Lease Expense (we prefer to deduct it).

Q: Is Free Cash Flow (FCF) the best metric for evaluating a company’s ability to service its Debt? If not, what’s better?

A: FCF is useful for determining a company’s ability to repay Debt principal, but not for determining its total Debt servicing ability because it deducts Interest Expense.

In “servicing”-type metrics, you should exclude or add back whatever you are trying to assess, such as the Interest Expense + (Scheduled) Principal Repayments here.

So, something like the Fixed Charge Coverage Ratio or the “corporate” variant of the Debt Service Coverage Ratio would be better than FCF / Total Debt Service.

Q: From a credit perspective, what is the main value-add of a full 3-statement model over a simple cash flow model based on an EBITDA to FCF bridge?

A: First, a full 3-statement model lets you project individual lines within Working Capital in more detail, which may be important in certain industries.

Second, it lets you more accurately review Balance Sheet-based credit stats and ratios, such as Debt / Equity and Debt / Total Capital.

Finally, it’s useful for getting a “full picture” of the company’s operations and issues that might create the need to raise capital in the future, since it tracks the Net Change in Cash more completely.

Q: A PE firm is seeking financing to support a leveraged buyout. Currently, the deal is levered at 5x Debt / EBITDA, but the sponsor wants to use 7x Debt / EBITDA, arguing that more leverage will boost the returns.

Are they correct? How would you evaluate this claim and decide?

A: They are incorrect because higher leverage does not necessarily “boost returns” in LBOs; it amplifies returns. Leverage makes good deals even better, but bad deals even worse.

If this company can service its Debt effectively at 5x Debt / EBITDA with a healthy “cushion,” and the deal still works even in downside cases, moving to 7x would probably boost the returns, but it’s impossible to say without more information.

As lenders, we would review the PE firm’s model and create more severe downside cases to stress-test it and review the differences in coverage ratios, leverage ratios, recovery percentages, and other stats at this 7x level.

Private Credit Interview Questions: Credit-Specific Technical Questions

These questions cover concepts and calculations that are unlikely to come up in standard IB interviews:

Q: Suppose that the Fixed Charge Coverage Ratio (FCCR) for one company in a Term Loan B deal ranges between 1.5x and 2.5x in the projected period. For a similar company in the same industry, it’s between 2.0x and 3.0x.

Does this necessarily mean that the other company has less credit risk?

A: Not necessarily because the FCCR has some “issues” with comparability across different companies. For example, for many tech and healthcare companies, Intangible Purchases are the equivalent of CapEx and should arguably be part of the calculation.

That said, if the calculations are equivalent and factor in all long-term investments for both companies, the company with the higher FCCR should have less credit risk.

Q: What’s the difference between the Yield to Maturity, Yield to Call, and Yield to Worst?

A: Surprise, surprise, but we have full tutorials on bond yields, including the Yield to Maturity (YTM), Yield to Call (YTC), and Yield to Worst (YTW).

The Yield to Maturity (YTM) is the annualized return an investor will receive if they buy a bond at its current market price and hold it until maturity, assuming the company makes all the required payments, and the investor reinvests the interest payments at the same rate as the overall return.

The Yield to Call (YTC) measures the annualized return an investor receives if they buy the bond at its current market price and hold it until the company “calls” it by repaying the bond early, often with a penalty fee attached.

The “Yield to Worst” (YTW) of a bond is the worst-case possible annualized return an investor could earn if they buy the bond at today’s market price and hold it until either maturity or until the company “calls” it by repaying it early; it’s the minimum of the YTC on each possible call date and the YTM.

Q: A company issues a $200 million Term Loan B with a 7-year maturity, a floating interest rate of Benchmark Rate + 5%, and an original issue discount of 4%.

What is the approximate IRR if the TLB has a 1% annual principal repayment and the Benchmark Rate falls from 5% to 3% over these 7 years?

A: The “average” interest rate over this period is (10% + 8%) / 2 = 9%, and the original issue discount adds approximately 4% / 7 = ~0.6% per year.

The 1% annual principal repayment reduces the interest earned each year, but it also means the lenders earn back 1% of their principal each year.

That 1% earned back before maturity will more than offset the reduced interest because 1% * $200 million = $2 million, but $2 million * 9% = $0.18 million.

And because of the time value of money, it’s more valuable to earn back $14 million in the holding period and $186 million upon maturity rather than waiting until maturity for the full $200 million.

So, we would expect an IRR “between 9.5% and 10.5%,” under the logic that the OID adds ~0.6% per year and the early principal repayments add less than 1.0%.

In Excel, the IRR is just under 10%:

Q: Are maintenance or incurrence covenants more common in private credit? Why?

A: Maintenance covenants relate to financial metrics that the company must maintain after it raises Debt (e.g., Debt / EBITDA must remain below 5x), while incurrence covenants limit the company’s actions (e.g., no asset sales or dividend issuances).

Maintenance covenants are more common on senior Debt, such as Term Loans, while incurrence covenants are more common on junior Debt, such as Subordinated Notes and Mezzanine.

Since private credit includes both senior and junior Debt, both types are common; many companies also negotiate customized covenants specific to their industries and business plans.

Q: What is a “workout,” and how does it differ from a formal restructuring? Can you give an example?

A: A “workout” is a negotiated agreement between the lender and borrower to resolve disputes and issues such as covenant violations without going through a formal restructuring or bankruptcy process, which are much broader in scope.

For example, if a company is having trouble servicing its Debt, the lenders might agree to a lower interest rate and an extended maturity in exchange for higher repayment fees and equity warrants.

It’s a narrower and less severe version of something like a debt-for-equity swap in a distressed or restructuring deal.

Private Credit Interview Questions: Market and Deal Process Discussions

This question category is less important than in fields like VC or GE because your entire job is understanding the market.

They could still ask for your general market views in private credit, but they’re more likely to frame the questions in terms of process differences and the trade-offs of different deal structures:

Q: Tell me about the direct lending market over the past year.

A: You’ll need to research this for each interview cycle, but a reasonable answer for mid-2025 might go like this (source here):

“Despite claims that the direct lending market is oversaturated, fundraising still grew by ~2% globally last year, even though private credit fundraising fell by over 20%. Banks and syndicated lenders have become more aggressive recently and started offering better pricing, which has compressed direct lending spreads by just over 1%. So, the market has become more competitive, but many people think that the more than $500 billion in high-yield bonds approaching maturity over the next few years will create more opportunities for direct lenders and boost the growth rate.”

Q: What are the main differences between private credit (PC) and “broadly syndicated loans” (BSL)?

A: PC and BSLs are similar in many ways (floating rates based on SOFR spreads, normally senior loans, and 5-7-year maturities).

But the pricing, execution speed, lender groups involved, and covenants set them apart.

Private credit loans tend to be more expensive than BSLs due to the “illiquidity premium” (lenders must hold the issuances until maturity), and the covenants tend to be more protective for lenders and customized to the specific borrowers (many BSLs are covenant-lite and have non-specific terms not customized for the borrower).

However, deal execution is faster, and the certainty of closing is higher since there are fewer participating lenders (1 – 10 rather than dozens or hundreds).

Q: A mid-sized restaurant chain is expanding its footprint in a new geography, which it is funding with its Free Cash Flow.

It also wants to complete a series of Debt-funded add-on acquisitions. How would you structure a Debt issuance to support this?

A: The most common option is a Delayed Draw Term Loan (DDTL), which lets borrowers withdraw funds over time rather than accepting everything upfront. They pay interest only on the drawn portion, so it’s like a general-purpose Revolver.

The terms should be tied to the performance of these add-on acquisitions – for example, the spread might change based on the cumulative EBITDA contribution from the Year 1 Add-Ons, and the covenants might require a certain “band” of acquisition activity or cash flow contributions each year.

Since the company is also expanding organically without Debt, the lenders would likely try to use these existing/organic assets as collateral if something goes wrong with the add-on strategy.

Q: How can you hedge the risks in private credit deals?

A: The main risk is the loss of principal, which lenders can mitigate via the seniority in the capital structure and the covenants.

The more senior the lenders are, the more likely they are to recover their principal in a bankruptcy or terrible exit, which is why direct lenders usually aim to be the most senior in the capital structure.

Covenants help because they provide some recourse if the company fails to perform; lenders might impose penalty fees or other terms that boost their returns or even call for immediate repayment in extreme cases.

Alternative returns sources can also help in cases where the risk is “moderate” but not enough to result in a total loss.

For example, if there’s some cash-flow risk in the first few years, lenders might negotiate a lower initial rate or a PIK interest component in exchange for a higher overall rate or higher repayment fee.

Private Credit Interview Questions: Deal Discussions

Just like you need to be prepared to discuss your own deals in private equity interviews, you also need to be prepared to discuss debt-related deals in private credit.

There are various articles about deal discussions and how to create “deal sheets,” so I will refer you to those.

The key differences for private credit include:

• Deal Stats: For any debt or debt-related deal (e.g., an M&A deal financed by a new issuance), make sure you know the pricing (coupon rate and YTM), the leverage, the covenants, the credit rating, and the overall strengths and weaknesses of the issuance. For syndicated deals, it also helps to know a bit about the other investors’ concerns.
• Investor’s Perspective: Instead of just coming up with a “yes” or “no” decision for each deal, be prepared to discuss where you would invest in the company’s capital structure (e.g., Term Loan A/B? Senior Notes? Subordinated?).

If you’re trying to find recent private debt deals – not your own – the Deloitte Private Debt Deal Tracker is a good starting point.

Many banks also publish weekly LevFin newsletters, and you can use sites like Private Debt Investor to find industry news (the FT also has a section).

Private Credit Case Studies

Most private credit case studies are like 3-statement models or LBO models, but with simpler mechanics, such as “cash flow only” projections.

Also, you focus more on the downside cases (proper assumptions and evaluations) and key credit stats and ratios, such as the FCCR, DSCR, etc.

You can calculate the IRR on a Debt issuance based on its coupon rate, OID, fees, warrants, and any other features, but it’s more important to calculate the likely Recovery percentages in different cases, factoring in the loan’s seniority.

Here’s an example from a case study in our Private Equity Modeling course:

We would expect the “Extreme Downside Case” Recoveries to be lower for the Mezzanine, but they’re still at 100% even with severe multiple contraction (e.g., a 40% drop).

The general idea is to stress-test the model with “Cash Flow Armageddon”-type scenarios and assess the risk for different lender groups (e.g., could the Mezzanine investors lose 50% of their principal? 30%? 10%? What about the Senior Note and Term Loan B investors?).

You also consider qualitative factors such as the market structure, cyclicality, and recurring revenue to estimate the likelihood of different outcomes.

You could get simple 1-hour private credit cases that require you to read the filings or a CIM and make a quick decision, but more involved, 3- or 4-hour cases with a model and a presentation are also possible.

Final Thoughts About Private Credit Interview Questions

If you’ve worked on many debt deals, private credit interview questions should not be difficult.

Yes, you may need to review certain points you don’t use regularly, but the fundamentals are similar in any credit-related job.

If you do not work on debt deals or have not done so in a long time, interviews are trickier because these concepts are more specialized, and most courses and guides do not cater to private credit.

No, we do not have a dedicated course (yet), but there are various case study examples in the Core Financial Modeling course, Private Equity course, IB Interview Guide, and some of the industry-specific courses.

Even the free 400 Questions guide has a section on ECM/DCM/LevFin and various credit-related questions throughout.

My general advice is to focus on case study practice with real companies because these tend to be far more difficult than the standard interview questions.

It’s the opposite of what many large PE firms did when they started moving into private credit: You’re raising your standards.