Evercore Restructuring Interview Questions You Need to Know
Ranking restructuring investment banks is hard. However, there is no question that among the Tier 1 restructuring investment banks you'll find Evercore.
Evercore's restructuring practice - founded by the legendary David Ying - has grown quickly and has picked up some of the largest out-of-court deals in recent years.
Evercore's restructuring practice is also entirely siloed from their other business lines. Meaning that you'll be applying directly for a position within restructuring and will only be interviewed by members of the RX team.
Below are five of the most frequent RX questions that crop up in Evercore restructuring interviews.
In every restructuring interview - but in particular for Evercore - you should expect some of the following questions:
- Bond math questions (on YTM at various durations)
- Waterfall questions (where you'll be given a cap table and asked what recovery values are)
- Restructuring specific accounting questions (around PIK, asset write downs, etc.)
If you'd like even more questions (roughly 500 more, to be exact), be sure to check out the Restructuring Interviews course.
A bond is worth $80 and has a 10% coupon maturing in one year. What's the YTM? What if it matures in two years, not one?
Before beginning to answer any question on bond math, you always want to make sure you have all the information you need.
For example, you haven't been told here whether or not the coupon is paid semi-annually or annually. This makes a difference.
Note: The YTM will be lower if it's paid twice a year.
For nearly all bond math questions - because they don't want you breaking out a calculator - they'll be annual calculations. However, you should have an intuition for how yields work nevertheless.
So, if we have a coupon being paid annually then we can use the simple, generalized formula C + (P-FV) / P where C is coupon and FV is face value.
Note: We weren't told in the question what the face value was. However, you can assume it's always $100 if the price is x < $100.
So we will have $10 of coupon payments, a spread between P and FV of $20 on maturity, and a current price of $80. Therefore, we have 30/80 = 37.5%, which is your answer (as can be verified with a YTM calculator).
Now what happens if the bond matures in two years, not one? Well we're getting one more coupon payment ($10), which is good, but we're now delaying getting the spread between FV and P for two years. So YTM is going to invariably be lower. Remember that YTM hinges on reinvesting proceeds at the same rate so cash flow today is always heavily preferred.
When dealing with maturities beyond just one year, we need to use the more formal estimated YTM formula. This won't get us the exact YTM - as that would involve a much more complicated set up - instead it'll get us a reasonably close approximation. It's important to point that out in an interview.
The estimated YTM formula, for when you have maturities equal or greater to two years, is simply the following where n is the number of years until maturity:
Using this formula we'll get down to (10+10)/90, which is 22.22%. You can verify that this is the correct estimated YTM with the YTM calculator linked above (which provides both the exact YTM and the traditional estimated YTM as well).
Enterprise value (EV) is $200 and we have a TL of $100, Senior Secured Notes of $50, and Unsecured Notes of $100 and another tranche of Unsecured Notes (maturing two years after the first) of $50. What are the recovery values throughout?
Here we have a slight spin on a typical waterfall question. First, we know that the TL and the Senior Secured Notes are going to be fully covered leaving $50 behind.
Now we have two groups of Notes (bonds) within the same class.
As an aside, which may be worth keeping in mind, in a Chapter 11 you'll have a Plan of Reorganization (POR) that will need to be submitted by the debtor. One of the requirements of the POR is that it treats all claims within the same class equally, unless otherwise consented to by one of the claims in the class.
In other words, if you're in the same class you have to actively agree to take less than your proportional share (which, as you can imagine, is rare to find!).
So in this question we have two separate Notes (differing in maturity and size, but not in their seniority) and they must be treated equally.
So this class of claims should be thought of as being $150 ($100+$50) and the amount they can lay claim to is $50. So the recovery rate for both is 33.33%.
It's also important to have the right verbiage down in an interview. These Unsecured Notes represent an impaired class that in the event of a Chapter 11 would be the ones that would vote on a POR. So the recovery rate of this impaired class is 33.33%.
Let's say we have $100 in debt with 15% in PIK. How does this flow through the three statements? Let's assume a 20% tax rate.
PIK accounting questions are very common in RX interviews because so many of the out-of-court restructurings done will involve some PIK.
Note: Why is this the case? The obvious answer is because the company likely doesn't have much cash on hand (negative FCF, limited liquidity) so PIK allows them to avoid imminent cash crunches. The less obvious answer, perhaps, is that PIK allows the company to offer a much higher interest rate (in this case 15%), which current holders who may be exchanging bonds into will find enticing.
So let's go through it. On the income statement (IS) you will have $15 in new interest expense in the form of newly issued debt. This creates a tax shield (another reason why you can have higher interest rate) of $3 ($15*20%). Therefore, net income is down by $12.
Moving to the top of the cash flow statement (CFS) you have $12, you then add back the $15 as it's a non-cash expense (that's the primary reason to do PIK!), so you have cash flow from operations up by $3.
On the balance sheet (BS) you have assets (cash) up by $3, on the liabilities side you have debt up by $15, and within shareholders equity (retained earnings) you have a $12 decrease from net income. So both sides of the equation are up by $3.
If you know a certain class of debt will be heavily impaired for a public company in distress, why might equity be trading above zero? Aren't they at the bottom of the capital structure?
While it's true that equity is (of course) at the bottom of the capital structure, equity also has hypothetically unlimited upside in the event the company turns things around.
It's entirely common for a company to be in obvious distress - where there will be impaired class(es) in the capital structure - yet equity is trading above zero.
This reflects the optionality of equity. In the event of a turnaround of some kind, equity could have incredibly large gains (whereas debt, even if trading at a heavy discount, will have more lacklustre gains as it will just creep back up to around par).
So as a company enters into distress equity increasingly begins to look like a call option with a capped downside (equity going to zero in the event of a Chapter 11) or having incredibly large upside if the company can turn things around.
Tupperware is a good, practical example of this where bonds were trading below fifty cents on the dollar in March of 2020 (so clearly quite distressed) yet equity was still trading above $1 per share. Tupperware successfully did an out-of-court restructuring - pushing out maturities until 2023 - and the equity is trading well over $30 per share in 2021.
If we have a leverage ratio of 5 and a coverage ratio of 5, what is the yield on the debt?
This is one of my favorite questions. It's a bit of a brainteaser, because when you hear the answer you'll realize just how easy it is.
I've written a rather long post on it over here where I go over two different ways to solve it (one brute force, one a bit more generalizable). So for the sake of brevity I won't cover it step-by-step here.
Let's start by noting our formulas. For the leverage ratio we have Debt / EBITDA and for the coverage ratio we have EBITDA / Interest Expense.
The key to this problem is being able to isolate the yield on debt (interest rate or r), but it's obviously not directly in any of the formulas here.
The key is to notice that all interest expense represents is Debt*(r).
So we can say that the coverage ratio is 5 = EBITDA / ((r)(Debt)) and isolate r by noticing that EBITDA / Debt is just the inverse of the leverage ratio (so it's 1/5) and we therefore arrive at r = 1/25 or 4%.
As a final note, one thing I should mention is that in all restructuring interviews one of the most important things to do is show that you have the contextual understanding of what RX really is in practice.
This is particularly true now as so many people are trying to get into restructuring positions.
This is largely the reason why the Restructuring Interviews course is not just a set of hundreds of Q&A (although those are there), but also includes a nearly 100-page guide on what restructuring is in practice, what the day-to-day job entails, and what examples of deliverables you'll need to produce look like.
The single best way to stand out and give your interviewer confidence that you're worth extending an offer to is by showing you know what you're getting involved in and that it is much different than "traditional" M&A investment banking.