Top 15 Restructuring Interview Questions

Restructuring interviews are known as being some of the toughest interviews on Wall Street. However, this reputation doesn't stem from how intellectually rigorous the questions are, but rather stems from how unaware most interviewees are of what restructuring really is in practice.

Invariably if you have an understanding of what restructuring is and what kinds of questions are asked, restructuring investment banking interviews are as easy to ace as any other traditional M&A interview.

Restructuring interviews can generally be thought of as having two components: 

  1. Traditional investment banking questions that you'll find in the traditional guides (e.g. walk me through a DCF, what happens if depreciation increases by $10, etc.)
  2. Restructuring specific questions that are unique to the world of restructuring

On this page we're going to cover 15 of the most popular restructuring specific questions that crop up at elite RX investment banks (like PJT, HL, Evercore, etc.).

If you're looking for even more questions - or want a more fulsome understanding of what restructuring really is in practice - be sure to check out the Restructuring Interviews course.

I created the Restructuring Interviews course because I recognized just how unprepared most candidates are when they interview and I just love writing about restructuring. It's been a fun side project and I've loved getting to meet those who sign up. 

On This Page

The following are links to each of the questions so you navigate through them a bit easier.

Question 1: You have a leverage ratio of 5 and a coverage ratio of 5. What is the interest rate?

Question 2: If we have EBITDA = 40m, EV/EBITDA = 5x, Senior Secured Debt of 150m, Unsecured Debt of $100m then what is the value of equity and the value of debt if a Chapter 11 is imminent? Where would the Unsecured Debt trade? 

Question 3: Why restructuring? Why not do traditional investment banking?

Question 4: We have a small group of bonds (let's call them the Unsecured Notes) coming due in a year. They're only $50m and the company has $70m in liquidity. Nothing else matures before these Unsecured Notes. Yet these Unsecured Notes are trading at 60 cents on the dollar. What's going on here?

Question 5: What Are The Characteristics of a Distressed Company?

Question 6: What Kinds of Things Will You Do as A Summer Analyst (or Summer Associate)

Question 7: Philosophically what really is an asset or a liability? Does it differ if the company is distressed?

Question 8: How do we think about capitalizing vs. expensing things? Anything to be mindful of in the context of restructuring?

Question 9: What is a common form of interest for distressed companies besides cash interest? How, if you have $100 of this, do you reflect it through the statements?

Question 10: Asset write downs are more common than asset gains for distressed companies. So, what happens when you have an asset write-down of $100?

Question 11: So, a company files for Chapter 11 and then must come up with a POR. What's that include?

Question 12: What are the two-sides of a restructuring? Who do we advise?

Question 13: What kind of "deals" do we do?

Question 14: A bond has a current price of 80, 10% coupon, and matures next year. What's the YTM? Will the YTM be higher if it matures in two years?

Question 15: What's a Cram Down? 

Let's get started...

Question 1: You have a leverage ratio of 5 and a coverage ratio of 5. What is the interest rate?

This is a very common question. So much so that I've written a much lengthier post on it here that you can read. In the post I detail two different methods of solving it that are equally effective (one more practical, one more theoretical). 

The first thing you should do when answering any questions that will take a few steps is write down what you know. Don't worry about being judged for not doing it all in your head as absolutely no one will do that. 

So we know that the leverage ratio is Debt / EBITDA and that it equals five. We also know that the coverage ratio is EBITDA / interest expense and that is equals five as well.

What we're being asked for (an interest rate) is what we need to isolate, but is obviously not explicitly within any of our formulas.

This leads many interviewees to begin to get nervous. The key to answering this question is taking a step back and saying, "What component of these equations could tell us about the interest rate?"

The obvious answer is obviously interest expense and that the interest rate is simply going to be the percent multiplied by the outstanding debt that gets you the interest expense. 

Put another way, the coverage ratio (for the purposes of this question) can be expressed as (r)(Debt) where r is the interest rate (what we're trying to solve for.

We know the coverage ratio is 5. Therefore, we can set up the equation as 5 = EBITDA / (r)(Debt). We can then transform this to 5*(r)(Debt) = EBITDA and then divide both sides by Debt.

We'll then have 5*r = EBITDA / Debt. Notice that EBITDA / Debt is simply the inverse of the leverage ratio. So we can now say 5*r = 1/5.

The final step is simply dividing both sides by five, which will get us: r = 1/25 or 4%, which is your answer. 

Question 2: If we have EBITDA = 40m, EV/EBITDA = 5x, Senior Secured Debt of $150m, Unsecured Debt of $100m then what is the value of equity and the value of debt if a Chapter 11 is imminent? Where would the Unsecured Debt trade?

This is a simple waterfall question. EV is just going to be 5*40 or $200m. This fully covers the Senior Secured portion so they are made whole. This also provides a 50/100 recovery on the unsecured debt (where $50 is what is left over after dealing with the Senior Secured). 

This means that the unsecured debt will be the impaired class in the eventual Chapter 11. They will therefore be the class who can vote on a POR and will get the reorganized equity of the company as compensation for the impaired nature of their holdings.

Therefore, you would not expect the Unsecured Debt to trade at 50, which is what you would expect in a pure recovery analysis, but rather some amount above it. This reflects the value of the reorganized equity they will have coming out of Chapter 11.

One can think of the spread between 50 and whatever the bonds are actually trading at as being a rough approximation of the equity value that the bonds will eventually have and the inherent optionality to that equity (meaning the equity could become worth a lot and at the very least won't be worth a negative amount, so it has some positive expected value to it by definition). 

Equity value is going to be marginally above zero. Prior to a Chapter 11 there's always a bit of embedded optionality to equity. After all, what if there's a big turnaround in the company? What if there's an out-of-court restructuring with favorable terms? What if the CEO finds $200m while walking to work?

Note: In the Restructuring Interviews course we get into capital structures, out-of-court restructurings, and Chapter 11 much more. With these waterfall questions there is always ambiguity and no answer can provide adequate levels of nuance, but this is about as fulsome and complete an answer as you can provide in a few minutes. 

Question 3: Why restructuring? Why not do traditional investment banking?

In traditional investment banking interviews it's reasonably rare to get the "Why M&A?" question. It's just a given that you're interviewing because investment banking offers a nice combination of prestige and money for those fresh out of college. 

However, in a restructuring interview you will always get a "Why not M&A?" question and your answer really matters. 

The reason why your answer really matters is that over the past five years - as investment banks have created dedicated RX recruiting separate from M&A - there has been a large influx in those wanting to go into RX. Primarily because it generally pays a bit more and generally has a bit more prestige attached to it. 

However, because of how few resources are out there on what restructuring really is, a large amount of interviewees have no idea what they're getting themselves into.

One of the singular best ways to differentiate yourself from other candidates is to have a compelling, mature answer to "Why not M&A?" that encompasses both the upsides of restructuring and the downsides.

You need to show that you've thought deliberately and seriously about your decision to pursue restructuring - even if just for a summer analyst stint - and that you are comfortable with your decision. 

This is such an important question that I've dedicated a whole post to it. So for the sake of brevity I won't repeat myself here. You can read the post here: Interview Question: Why Restructuring?

Briefly what I will say is good answers will touch on:

  • The breadth of industries and companies a restructuring analyst or associate will deal with (e.g. no industry silos like in some investment banks for M&A)
  • The uniqueness of deals (since every distressed company will have a different balance sheet and different situation that has led to their distressed situation)
  • The confluence of finance, law, and psychology inherent to the job
  • The fact that, unlike in M&A, if you get tired of high finance you can't just jet off to a corporate development job, because you've developed a very narrow area of expertise that isn't overly relevant outside of PE, HF, or IB life (this is an obvious downside)
  • The fact that young folks generally have more responsibility earlier given the lean nature of teams in RX. For example, as a summer analyst at an elite boutique I did the vast majority of a pitch myself and went to the client meeting. This isn't the norm per se, but it wasn't an exceptional circumstance either.

Question 4: We have a small group of bonds (let's call them the Unsecured Notes) coming due in a year. They're only $50m and the company has $70m in liquidity. Nothing else matures before these Unsecured Notes. Yet these Unsecured Notes are trading at 60 cents on the dollar. What's going on here?

This is a pure restructuring question meant to gauge just how much you know about the capital structure dynamics that drive restructuring events.

At first blush this fact pattern may not make much sense. We have Unsecured Notes coming due in a year with nothing else in the capital structure maturing before them.

Further it doesn't appear there's even a need to roll these Unsecured Notes over (meaning there's no need to refinance them). We can just pay them off with the ample liquidity the company has. 

As a restructuring analyst or associate one thing you will spend countless hours doing - and trust me, they seem like countless hours - is scouring credit documents and public financials for the exact terms of different parts of the capital structure. 

One of the things you will always be keeping an eye out for is what we call "springers" or "springing maturities". A springer is simply an express term that says something to the effect of, "If Loan or Bond X has not been re-financed by Y date, then this Loan or Bond will spring Z months before X's maturity date." 

In other words, if by a certain date a loan or bond lower in the capital structure has not been mostly or completely re-financed than some loan or bond higher in the capital structure will have its maturity date spring forward.

So for example, a term loan (let's call it the Term Loan A or TLA) could have said that if the Unsecured Notes still have more than $10m outstanding by six months prior to their maturity date, then the full TLA will mature three months prior to the maturity date of the Unsecured Notes. In effect the TLA jumps the cue. 

Why is this done?

More senior pieces of the capital structure want to ensure that a situation doesn't arise where some junior piece of the capital structure gets paid out, using up all or most of the liquidity of the company, leaving less for the more senior piece of the capital structure when they come due. 

So moving back to our example here, why would these Unsecured Notes be trading at 70?

Well it's because there's likely a springer on some more senior piece of the capital structure that's much larger in size. So if the Unsecured Notes are not refinanced or paid off in full, the more senior piece of the capital structure will mature before it, which the company will not have the capacity to roll over or pay off in full. This could precipitate a restructuring (whether out-of-court or in-court) and the Unsecured Note holders likely believe that, as a result, their Notes are only worth 50-60.

Now the obvious retort is: there's ample liquidity to just pay off (forget about refinancing!) the Unsecured Notes. Why not just do that?

Liquidity is not synonymous with cash. Perhaps the company has $2m in cash and $68 of an ABL that they can draw. However, the ABL may have certain terms surrounding the draw that preclude the company from drawing all or most of it. 

Further, perhaps the company has declining EBITDA, poor FCF, etc. making it impossible to go out and raise new debt to roll over these Unsecured Notes (despite the appearance of ample liquidity). 

So the chain of events would be:

  • The Unsecured Notes that can't be paid off in full using liquidity (because the liquidity primarily comes from a revolver that has certain terms precluding further draw downs)
  • The Unsecured Notes can't be refinanced because of the overall poor financial performance of the firm (despite the appearance of having ample liquidity) 
  • The company does not have a year to figure things out, but rather has 6-9 months because of a springing maturity on a much larger, more senior piece of the capital structure exists
  • Therefore, these Unsecured Notes are trading down significantly because time is running out for the company to figure out how to reconfigure their capital structure and in the event of a Chapter 11 the Notes will be impaired and perhaps only deemed to be worth 50-60 (or an out-of-court will occur where the Notes will be asked to take a big haircut)

Alright. There's a lot here, I know, and the reality is you could come up with a number of potential answers to this style of question (that's partly why it's asked!). 

However, as a general rule if you know a thing or two about restructuring you want to make sure your interviewer knows. 

For example, an answer that wouldn't necessarily be wrong for this question could just be, "The company has had a major class action suit against it and so no one will refinance any part of the capital structure and the company will almost certainly file Chapter 11. That's why the Unsecured Notes are trading down."

There's nothing wrong about this answer per se. It could very well be the case. However, it doesn't really show you know what restructuring is. The answer above explicitly gets into what liquidity is, what springing maturities are, and implicitly covers what maturity walls are.

Question 5: What Are The Characteristics of a Distressed Company?

The story of how a company becomes distressed is always unique, but invariably has some essential characteristics. 

With that said, we do need to differentiate between companies that are distressed and companies that are in need of restructuring, because there is a difference.

While the venn diagram between distressed companies and those in need of restructuring is almost a circle, it's not entirely a circle.

There are companies with incredibly poor financials - negative FCF, declining EBITDA, equity trading down, etc. - that for our purposes aren't in need of restructuring, but may be considered distressed.

This can either be because they have no debt or debt that matures many years from now. These companies can wallow in their declining performance for years without them every needing to think about restructuring. 

Companies that will come through a restructuring investment bank invariably will have some necessary reason for doing so. There will be some catalyst - within the next 8-24 months normally - that requires them to do something out-of-court or in-court to right size.

When answering any kind of question about why a company will come to a restructuring investment bank, or what characteristics said company has, you should always think about the catalysts. 

I've written a rather long post on some good answers to this question here: Interview Question: What Are The Characteristics of a Distressed Company?

The short answer is: 

  • Limited liquidity which means they will have limited runway for continued operations assuming current and continuing negative FCF
  • Maturity walls coming due with the company perhaps not believing they can refinance what is coming due 
  • Debt trading down can be a signal of distress, because debt trading levels will incorporate the likelihood of a restructuring

Question 6: What Kinds of Things Will You Do as A Summer Analyst (or Summer Associate)?

This is another type of question that you wouldn't expect in a traditional investment banking interview, because everyone knows the tasks expected of you on the job.

However, in restructuring the vast majority of interviewees have no idea what the day-to-day work really is. 

You absolutely - and I can't stress this enough - get caught flat footed here and not know what you'll roughly be doing day-to-day. Here's a rough breakdown.

Summer Analysts

  • Update screens 
  • Create screens
  • Create profiles
  • Help with pitches (e.g. updating cap tables)
  • Lightly help with live deals

Summer Associates

  • Will do a few screens and profiles to gain experience
  • Help out on a pitch (with an eye toward how the process is managed)
  • Help out on a live deal (in particular, gaining modelling exposure)
  • Understand deal structure and how work is doled out to analysts and timelines are managed (will also probably do quite a few pro forma cap tables as well)

Every restructuring bank will be a bit different. So you shouldn't be absolute about anything. For example, when I was a summer analyst I did 80% of the work on a pitch and went to the client meeting (at a Sponsor the MD knew very well). 

What your interviewer really wants to hear are certain keywords. These keywords are "screens", "profiles", and "cap tables". These are the things that are unique to restructuring investment banking.

Question 7: Philosophically what really is an asset or a liability? Does it differ if the company is distressed?

For a company, an asset is really something that can generate additional cash, or contributes to it in an essential way, in some period(s) in the future. Often the way we think about valuing assets within a company is in some form of discounted cash flows not dissimilar to how we value a company in aggregate via a DCF.

Liabilities are just the opposite. They strip away cash directly or indirectly sometime in the future (perhaps over multiple periods).

For a distressed company, something kind of strange happens: assets suddenly are deemed to have less capacity to generate cash directly or indirectly in the future, while liabilities strip away roughly the same amount of cash directly or indirectly.

Think about PP&E for a healthy company that then turns distressed perhaps because their products are no longer in vogue are these assets worth more or less than before? Obviously less.

Now think about the debt of a healthy company that then turns distressed perhaps because their products are no longer in vogue are the liabilities worth more or less than before? Well, from a cash perspective, the same amount is due unless there’s a restructuring event of some kind, right? Yes, the market value may be less, but the book value remains the same until that debt is restructured or a bankruptcy occurs.

This can all really be summed up as saying that liabilities are more “sticky” in their cash drain than assets are in their cash gain.

Question 8: How do we think about capitalizing vs. expensing things? Anything to be mindful of in the context of restructuring?

We capitalize things when their useful life is over a year and then depreciate it or amortize it over the relevant period (by convention).

In distressed, we care a lot about capital leases, because they are considered debt and are often added (if they’re large) to cap tables.

Capital leases are generally leases in which the lease runs for:

  • At least 75% of the useful life of the asset (most common one)
  • Contains a "bargain" purchase price option at end of lease (get the asset at a steep discount)
  • There is optional ownership takeover language when the lease ends
  • The PV of the lease payments represents over 90% of the asset's fair market value

Note: Don't be confused by the fact that in a Chapter 11 you can assign or reject leases. These can be normal leases for retail space that are not necessarily capital leases. 

Question 9: What is a common form of interest for distressed companies besides cash interest? How, if you have $100 of this, do you reflect it through the statements?

PIK is quite common for distressed companies as it reduced cash interest expense.

Pre-tax income falls by $100, because PIK is a form of interest. So net income falls by $60 (assuming a 40% tax rate).

On the cash flow statement, you have cash down $60, but you add back $100 since PIK is obviously not cash. So cash is up by $40.

Cash on the balance sheet is therefore up by $40. On the liabilities since you have $100 of new debt (due to the PIK) and within shareholders equity you have retained earnings fall by $60.

Question 10: Asset write downs are more common than asset gains for distressed companies. So, what happens when you have an asset write-down of $100?

Asset write downs affect the income statement since losses operate as a tax shield. So, the income statement, pre-tax, is down $100, and after tax down $60.

Within CFO it begins with -$60, but an asset write-down is non-cash, so we add back $100 making CFO up by $40.

On the balance sheet cash is up $40, but the actual asset in question (say PP&E) is down by $100, so the asset side of the BS is down $60. Nothing occurs in liabilities, but the SE is obviously down by $60 as net income flows into retained earnings.

Question 11: So, a company files for Chapter 11 and then must come up with a POR. What's that include?

Section 1123 has five mandatory provisions.

  1. Plan must designate classes of claims and classes of interest (e.g. must provide a detailed cap table)
  2. Plan must specify any class of claims or interest that are not impaired under the plan (e.g. classes that have full asset coverage thus will not be able to vote or are otherwise not deemed impaired)
  3. Plan must specify the treatment of any class of claims or interest that are impaired under the plan (e.g. what are you offering them in the re-organized company upon emergence from bankruptcy since they are impaired)
  4. Plan must provide the same treatment for each claim or interest of a particular class unless requisite vote holders agree to less favorable terms
  5. Plan must provide the adequate means for the implementation of the plan (meaning, the plan must be feasible and achievable) 

Question 12: What are the two-sides of a restructuring? Who do we advise?

There’s the “debtor” side, which is the company, and the creditors side, which is the bond holders or loan holders. Debtor mandates involve just dealing with one party: the company. Creditor mandates usually involve dealing with a large number (it can be three or it can be ten or more) bond or loan holders within a certain class who band together.

So, for example, maybe the unsecured bonds are likely going to be an impaired class and then will have to vote on a POR (plan of reorganization) in bankruptcy. The bondholders will then gather together (not necessarily all of them, but a significant amount, usually enough to have a blocking position which is 33.4%) and hire a RX shop like HL to advise on what they should demand, how they should negotiate, and what they should ultimately accept or reject.

All major RX shops will take on debtor or creditor mandates, but some are known to do more of one than the other. For instance, HL does more creditor mandates while PJT, Evercore, and Lazard do more debtor mandates. However, like I said, all will take either creditor or debtor mandates. For instance, see PJT’s involvement with Legacy Reserves where they are advising GSO (Blackstone). PJT is known more for their debtor mandates, but they are very active on the creditor side as well.

Question 13: What kind of "deals" do we do?

What makes RX such an interesting space is how diverse the set of deals you’ll be working on are.

Because every company has a different capital structure, with different points of stress in it, nearly every restructuring solution will feel unique and novel.

With that said, you have two broad categories of deals: out-of-court restructurings and Chapter 11s.

Within each of these categories, there are many permutations. Within out-of-court restructurings you can have deals involving extensions of maturities (“amend and extend”), exchanging of securities, and wholesale reconfigurations of the entire capital structure.

Within Chapter 11s you can have pre-packs (to get in and out quickly), long Chapter 11s, and 363 asset sales.

Question 14: A bond has a current price of 80, 10% coupon, and matures next year. What's the YTM? Will the YTM be higher if it matures in two years?

Bond math will likely come up in your interview. All that will generally be required is to know the YTM formula and generally have an understanding of when yields are going to be higher or lower. 

For this question, think about YTM = (c + (FV - P)) / P where c = coupons, FV = face value, and P = current price.

Note: Your interviewer will assume annual coupon payments (not semi-annual) and a FV of 100 in these questions. Unless told otherwise, don't ask for clarification. 

Therefore we have (10 + (100-80)) / 80 = 0.375 or 37.5%. This is the exact YTM as you can verify with a YTM calculator

If the bond matures in two years, then the YTM will be lower. This should be intuitive as instead of getting the $20 (FV - current price) this year, you have to wait two years. 

 

For maturities greater than a year you'll need to use the estimated YTM formula in an interview, which you may already be familiar with. 

YTM Formula

Where n is the number of years until maturity. 

Keeping with the variables in the question, using two years until maturity, we'll have 20/90 or 22.22% as our YTM answer. The YTM calculator linked above provides the actual YTM and the estimated YTM (which is what the formula above gives). Therefore, you may want to play around with different coupons, prices, and maturities to make sure you're comfortable doing these kinds of questions. 

 

Question 15: What's a Cram Down?

Cram downs are not common, but sometimes you'll be asked if you know what they are in an interview just because any book on restructuring or distressed debt will talk about it.

A cram down is a process by which a plan of reorganization (POR) is imposed on an impaired class that has voted to reject the plan. Can be done by the court if at least one impaired class (not including insiders) votes for the POR.

Cram downs are done to avoid having one block of votes filibuster the capacity for a company to get out of Chapter 11.

Here’s a good piece from Skadden on recent legal battles over cram downs. You’ll be shocked to find out that this is a legally contentious issue.

Conclusion

As you can tell, answers to RX questions tend to be quite nuanced.

This is both a good and a bad thing. It's a good thing because it means that there is room for ambiguity and if you give an answer slightly different than what the interviewer expected that's not necessarily an automatic ding. It's a bad thing because you do need to have a proper contextual understanding to really nail many restructuring specific questions. 

For example, a great answer to Question 4 does require quite a bit of understanding of how restructuring works in practice. 

Another thing to keep in mind, as hopefully you've noticed, is that traditional M&A questions can be made into restructuring specific questions as well (as was demonstrated with Question 8, for example). 

As with traditional investment banking interviews, there are a set of questions that most commonly crop up (or some permutation of them).

While restructuring interview questions are hard to come by, I have compiled over 500 questions and a nearly 100-page guide detailing exactly what restructuring investment banking is in practice.

It has been a labor of love, not profit, so it doesn't cost $300 like so many of the traditional investment banking guides. It makes me enough for a few nice bottles of wine a month so that's good enough for me (given that I'm pretty busy with my day job, as you'd imagine). 

It's the most comprehensive resource ever compiled and will help you not only prepare for the interview, but be a top-bucket analyst or associate when you begin. 

If you'd like to check it out, you can do so here.

Best of luck in your interviews!

Alex