The Private Credit Case Study: The Same Company, The Opposite Question

Give a buyout candidate and a credit candidate the same company, the same three years of accounts and the same two hours, and watch what they build. For the first ninety minutes the two models are nearly identical. Revenue drivers, margin assumptions, working capital, capital expenditure, a debt schedule. Then they diverge completely, and the divergence is the entire exercise.

The buyout candidate runs it to a return and asks what the equity makes. The credit candidate stops before that line and asks something else: where in this capital structure would I lend, at what price, and do I get my money back if the plan does not work.

That is the whole reframe, and candidates who arrive at it in the first five minutes tend to pass.

~90%

of the model is shared

Revenue, margin, working capital, debt schedule

0

equity returns in a credit case

The output is leverage, coverage, recovery

1 of 4

tranches you might choose

Senior, unitranche, subordinated, or pass

The two exercises, side by side

The last row on that table is the one people underestimate. A buyout case has a binary answer. A credit case usually does not, because the capital structure gives you somewhere to hide. You can be enthusiastic about a business and still decline the junior tranche, or unenthusiastic and still lend senior at the right price with the right documents. Saying so is not fence-sitting. It is the job.

A buyout candidate asks

• What does the equity earn?
• What exit multiple can I defend?
• How fast does the plan compound?
• Do I buy, or do I pass?

A credit candidate asks

• Where in the structure would I lend?
• At what price, and with what covenant?
• What happens when the plan misses?
• Am I repaid, and from what?

What you are actually being marked on

Three things, roughly in this order.

1. Did you frame it as a lending decision? This is binary and it is decided early. An answer that opens on market share and ends on an exit multiple has failed before the numbers are checked.
2. Are your downside assumptions specific? "I stressed revenue" is not an assumption. "Revenue down sixteen per cent, in line with the 2020 trough for this sector, with two hundred basis points of margin compression because the cost base is largely fixed" is one.
3. Did you finish? A recommendation with a tranche, an indicative price and a covenant level beats a beautiful model that trails off when the clock runs out.

Everything else is secondary. Formatting, colour coding and circularity toggles are hygiene, not marks.

The model, and how much of it you need

Enough to support a view, and no more. The parts that earn their place:

• Revenue and margin drivers you can defend out loud. Three drivers you can explain beat twelve you cannot.
• EBITDA to free cash flow, honestly. Working capital, capital expenditure, cash taxes and cash interest. This bridge is where credit candidates separate themselves, because it is where a business that looks profitable turns out not to generate cash.
• A debt schedule with the tranches you are actually considering, their margins, any amortisation, and the cash sweep if there is one.
• The two or three ratios the decision turns on. Not every ratio you know.

What to leave out: a detailed exit, a returns page, a full three-statement build with a balancing balance sheet, and any schedule that does not change the recommendation. Detail that does not move the answer is detail that cost you the answer.

The outputs that matter

Leverage

Total debt to EBITDA, and net debt to EBITDA if there is meaningful cash. State it two ways where the adjustments are contested: as reported by the sponsor's model, and on your own numbers with the add-backs you would not accept. The gap between those two figures is often the most interesting thing you will say all session.

Adjusted EBITDA is where this gets decided. Synergies, run-rate savings and transaction costs all get added back, and lenders increasingly cap those adjustments as a percentage of EBITDA and put a time limit on them. A candidate who asks whether the add-backs are capped and sunset has demonstrated something no amount of modelling shows.

Coverage

Interest cover, EBITDA over cash interest, is the first test. The fixed-charge coverage ratio widens it to scheduled repayments, tax and unavoidable capital expenditure, and it is the more honest number. A borrower can look comfortable on interest cover and be tight on fixed charges, and that borrower is exactly the one that gets into trouble when trading turns.

Recovery

If it goes wrong, what does each tranche get back. The mechanical half is a waterfall: senior secured, then senior unsecured and second lien, then mezzanine, then equity, against a stressed enterprise value or a liquidation estimate. The judgement half is whether that value is real. A business with recurring contracted revenue and tangible assets recovers differently from one whose value is a customer list and a brand, at the same headline multiple.

The downside case, done properly

This is the section interviewers remember, and it has a shape.

Name the stress and say why that one. Anchor it to something: the last recession in this sector, the loss of the largest customer, a structural shift already visible in the numbers. A stress with a reason behind it invites a conversation. A round-number haircut invites a shrug.

Carry it through to the ratios. Revenue falls, margin compresses because most of the cost base does not flex, EBITDA falls further than revenue did, leverage rises and coverage falls. Say the numbers out loud at each step.

The sentence that turns it into a decision

Finish on the covenant. Does the maintenance test still hold, and with how much room. The phrase to have ready is whether there is at least a turn of cushion left. That single sentence turns an analysis into a lending decision.

Then say what you would do about it. More equity underneath you, a tighter covenant, an amortising tranche instead of a bullet, a smaller cheque, or a higher price. A downside that ends in "so it is risky" has stopped one step early.

A worked downside, with the arithmetic shown

Numbers invented for the example, but the mechanics are the ones you will be asked to run. Start with a business at £120m of revenue and a twenty per cent margin, funded with £96m of debt priced at five hundred basis points over a three per cent reference rate, and a leverage covenant set at 5.5x.

Three things to say out loud about that table.

EBITDA falls further than revenue does. Sixteen per cent off the top line becomes twenty-two per cent off EBITDA, because most of the cost base does not flex in a year. Candidates who hold the margin flat in a downside have not stressed anything.

The covenant holds, and that is not the finding. The finding is the last row. Opening headroom of twenty-seven per cent is on the tight side of a market that has drifted to thirty and above, and after this stress only six per cent of it remains. The business is compliant and out of room at the same time, which is exactly the position lenders spend their time trying not to be in.

So the recommendation changes, and you say how. Lower opening leverage, a wider covenant level, an amortising tranche rather than a bullet, a smaller hold, or a higher price. Naming which one you would push for, and what you would concede to get it, is the difference between an analysis and a decision.

Old standard

25%

Now typical

30%

Described as cov-loose

35%

Aggressive large-cap

40%

These are market categories, not a series over time. Wider headroom is more borrower-friendly. Knowing roughly where the market sits is what lets you call a structure tight, market or generous, which is a far stronger answer than a number with nothing to compare it against.

Where in the capital structure, which is the question with no buyout answer

Most candidates treat this as a formality and it is where the marks are.

Repaid from the top down. Each band is sized by its share of the structure.

Senior secured45% · first out, lowest spread

Unitranche← you lend here20% · senior and junior blended

Second lien10% · junior by lien priority

Mezzanine10% · subordinated, often PIK

Sponsor equity15% · the cushion beneath you

Shares are illustrative. What matters is the order: everything below you has to be wiped out before you take a loss, and everything above you is repaid first. That is the whole of what you are choosing between.

Two things to have ready before you answer this one:

• An indicative price. A margin over the reference rate, plus an arrangement fee and an original issue discount. You will not be marked on precision. You will be marked on whether you knew a price belonged in the answer at all.
• The difference between second lien and mezzanine, because it gets probed. Second lien is junior by lien priority within the same borrower group. A structurally subordinated instrument sits at a different entity in the chain, and the two behave very differently in a restructuring.

The documents, and how much you are expected to know

An analyst is not expected to draft a credit agreement. An analyst is expected to read a term sheet and say what it does to lender protection.

• Maintenance against incurrence. A maintenance covenant is tested every quarter whether the borrower does anything or not. An incurrence covenant only bites when the borrower acts: raising debt, paying a dividend, buying something. Retaining maintenance tests is one of the things private credit sells to its own investors, so which one a deal carries tells you who had negotiating power.
• Baskets and restricted payments. How much can leave the group, and under what conditions.
• The most-favoured-nation clause. If new debt is raised at a wider spread, this resets the yield on the existing debt so it stays on market. It comes in a pricing version and a terms version, and its sunset, the point at which the protection expires, is a live negotiating tension.
• Portability. Whether the sponsor can sell the business without triggering repayment, provided leverage sits inside an agreed band.

You do not need all of this in an analyst case. Asking one intelligent question about it is worth more than reciting all four.

What you would ask management

A credit paper that names no diligence questions is a paper that has not been written by a lender. This is not hedging, and it is not a list of things you failed to work out. It is the shortest way to show that you know which uncertainties actually move the decision.

Two or three questions, each tied to something in your own analysis:

• On the cost base. How much of it is genuinely variable within twelve months. Your downside stands or falls on this and the accounts rarely answer it.
• On the customers. Contract length, renewal history, and what notice the largest one has to give. Concentration is only as dangerous as the exit terms allow.
• On the add-backs. Which synergies are already actioned and which are planned, with the evidence. An add-back that has happened is a fact and one that is forecast is a forecast.
• On capital expenditure. What proportion is maintenance rather than growth, because only one of those can be deferred when cash is short.

Each of those is a question whose answer would change a number in your model. That is the test of whether a diligence question is worth asking.

The formats, and how to handle each

• Two hours in the office. Expect a pack, a laptop and a blank spreadsheet. Build fast, decide early, and reserve the last twenty minutes for the memo. Nobody has ever regretted finishing.
• Overnight or a weekend. The model is assumed to be clean, so the differentiation moves entirely to the memo and the judgement in it. Spend the extra time on the downside and the structure, not on formatting.
• A full week. Usually a real deal the firm looked at — the Ares guide describes one firm that runs a group case inside an assessment day rather than a solo take-home. They know the answer. They are testing whether you find the same issue they did, so hunt for the one thing that makes this credit awkward rather than producing something comprehensive.
• Memo only. Increasingly common, and a gift. It removes the modelling race and marks only the thinking.

The memo, in the order that reads best

1. The recommendation, first. Tranche, size, indicative price, and the covenant you want. One paragraph, no preamble.
2. Why the business services debt. The two or three things that make the cash flow reliable, or do not.
3. The structure and why it fits. Where you sit, what is beneath you, what security you have.
4. The downside, with named assumptions and the covenant position at the end of it.
5. The three risks that would change your mind, and what would have to be true for each.
6. What you would need in diligence. This is not a hedge. Naming the two questions you would ask a management team is what a real credit paper does.

Where candidates lose it

• Answering the buyout question. The single most common failure, and it happens because the model is familiar and the instinct runs to a return.
• A downside with no name. An unspecified haircut applied to everything tells the reader nothing about your judgement.
• A stress so severe nothing survives. If every tranche breaks under your downside, the exercise has stopped discriminating and you have not made a decision.
• Treating adjusted EBITDA as EBITDA. Accepting the sponsor's number without a word about the add-backs is the analytical equivalent of not reading the document.
• No price. A tranche recommendation without a margin is half an answer.
• Running out of time in the model. See the formats above. Decide early, then test.

What good actually sounds like

Senior secured term loan, four and a quarter times, priced around five hundred over, with a leverage covenant set at five times giving roughly twenty per cent headroom. The business is contracted, the customer concentration is uncomfortable but the contracts are long, and in my downside leverage goes to four point nine, so the covenant holds with a turn of cushion. I would not go into the unitranche here: the extra spread does not pay for sitting behind nothing at this level of concentration.

Six sentences. A tranche, a level, a price, a covenant, a downside carried through, and a reasoned refusal of the more aggressive option. That is the exercise.

How to prepare, in order

1. Learn the bridge from EBITDA to free cash flow cold. Everything in a credit case funnels through it, and it is the fastest thing on this list to fix.
2. Practise the downside out loud. Take any business you know and talk through a named stress to a covenant position in three minutes. Do it until it is boring.
3. Learn the tranches and what each is paid for. Not definitions. The reason a lender would choose each one.
4. Read one real credit agreement summary. A law firm's market study on covenant terms will teach you more per page than any question bank.
5. Get comfortable saying no. Declining a tranche with a reason is a strong answer, and candidates trained on buyout recruiting are reluctant to give it.
6. Have a price in your head for the structures you would propose. Approximate is fine. Absent is not.

The bottom line

The credit case study is not a harder version of the buyout case and it is not an easier one. It is a different question asked about the same facts, and almost everything that goes wrong in it goes wrong in the first five minutes, when a candidate decides which question they are answering.

Decide that you are lending. Build only enough to support the view. Spend your time on the bad year rather than the good one. Then say where you would sit, what you would charge, and what would have to happen for you not to be repaid.