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 about 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:
- 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.)
- Restructuring specific questions that are unique to the world of restructuring
If you're looking for hundreds more restructuring 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.
Creating the course has been a fun side project and I've loved getting to meet those who sign up. I'm always happy to answer their questions and see them get into restructuring.
While most interview guides are absurdly expensive - costing hundreds of dollars - I don't charge anything close to that. The course really aims to appeal to not just those interviewing for a restructuring job, but also those who are just curious about what restructuring investment banking is, what the deliverables look like, etc.
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The following are links to each of the questions so you navigate through them a bit easier.
Question 2: If we have EBITDA = 40m, EV/EBITDA = 5x, Senior Secured Debt of 150m, and 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 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?
Let's get started...
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. In fact, not writing down your thinking may signal to the interviewer that you already have heard the question and have memorized the answer.
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 the interest expense component of the coverage ratio. The interest rate is a percentage that, when multiplied by the outstanding debt, gets you the interest expense (which is used in the coverage ratio).
Put another way, the coverage ratio (for the purposes of this question) can re-written with (r)(Debt) replacing interest expense where r is just the interest rate.
Alright, so backing up 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, and 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 relatively simple waterfall question. However, the key with answering waterfall questions is not just getting the question right, but sprinkling in the right terminology to show you have an understanding of restructuring more fully.
Enterprise value (EV) is just going to be 5*40 or $200m. This fully covers the Senior Secured class of debt so we know they are made whole. This also provides a 50% ($50/$100) recovery on the Unsecured class of debt (where $50 is what is left over after dealing with the Senior Secured class of debt).
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 plan of reorganization (POR) and will get the reorganized equity of the company as compensation for the impaired nature of their holdings.
Therefore, you would not necessarily 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 in addition to their recovery.
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. By optionality I mean the equity could become worth a significant amount and at the very least won't be worth a negative amount, so it has some positive expected value to it by definition.
Prior to filing Chapter 11, 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. One thing to watch out for in waterfall questions are additional follow-up questions about impaired classes, the optionality of equity, etc.
These follow-up questions - some of which were addressed in the answer above - separate out those who can answer the "basic" waterfall question and those who have a more full understanding of restructurings.
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 of 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 a good answer will touch on some of the following:
- The breadth of industries and companies a restructuring analyst or associate will deal with (meaning there are no industry silos in RX like most investment banks have with their various coverage groups)
- The unique nature of restructuring deals (since every distressed company will have a different balance sheet and a different situation that has led them to their distressed situation)
- The confluence of finance, law, and psychology inherent to the job that generally has no parallel in traditional M&A
- 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 private equity firms, hedge funds, or investment banks (this is an obvious downside, not an upside)
- 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 seemingly 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 through 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 queue.
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 60?
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 (given how far down in the capital structure they are).
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 (a form of revolver) 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 when they are financially stressed.
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 in this event would be:
- The Unsecured Notes 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 existing
- 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! Great restructuring interview questions have embedded ambiguity and make you come up with creative, thoughtful answers.
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. That's why the Unsecured Notes are trading down. The company may be filing before the maturity of these Notes anyway."
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. You've just come up with an interesting hypothetical rationale. The former answer, however, explicitly gets into what liquidity is, what springing maturities are, and implicitly covers what maturity walls are. The former answer shows off how much you know - or now know - about restructuring, whereas the latter answer doesn't tell the interviewer much of anything.
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 ever 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 the company.
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 approaching with the company perhaps not believing they can refinance the debt that is coming due
- Debt trading down can also be a signal of distress, because debt trading levels will incorporate the likelihood of a restructuring
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 so this is a good way to differentiate between candidates.
You absolutely can not - 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.
- Update screens
- Create screens
- Create profiles
- Help with pitches (e.g. updating cap tables, formatting slides, etc.)
- Lightly help with live deals (perhaps do a bit of work in the model)
- 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 how timelines are managed (a summer associate 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 primarily "screens", "profiles", and "cap tables". These are the things that are unique to restructuring investment banking and show you understand the crucial tasks of a junior employee.
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 just something that can generate additional cash, or contributes to cash generation in an essential way, in some period(s) in the future. Often the way we think about valuing assets within a company is via 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 and the associated obligations remain 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. This is something to always keep in mind when thinking about distressed companies.
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 situations, 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, assume, 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?
Payment-in-kind (PIK) interest is quite common for distressed companies as it reduced cash interest expense.
In this example, 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 a non-cash expense. 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, on the income statement, it's down $100 pre-tax and after tax it's 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 for a plan of reorganization (POR).
- Plan must designate classes of claims and classes of interest (e.g. must provide a detailed cap table)
- 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)
- 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)
- Plan must provide the same treatment for each claim or interest of a particular class unless requisite vote holders agree to less favorable terms
- Plan must provide the adequate means for the implementation of the plan (meaning, the plan must be feasible and achievable)
There’s the “debtor” side, which is the company, and the creditor side, which involves the bond holders or loan holders. Debtor mandates involve the restructuring group 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 restructuring groups 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.
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), traditional Chapter 11s, and 363 asset sales.
This is obviously one of the more complicated parts of restructuring that is gone over in the course, if you're curious or have an interview coming up
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 (and, of course, in finance cash today is always worth more than cash tomorrow).
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.
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.
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 them.
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. This 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, I'm sure, to find out that this is a legally contentious issue which ends up making lawyers relatively hefty fees.
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 of restructuring in order 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 restructuring questions (or some permutation of them) that most commonly crop up in interviews.
While restructuring interview questions are hard to come by, I have compiled over 500 of these 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).
I believe I've created the most comprehensive resource ever compiled and that it will help you not only prepare for an interview, but be a top-bucket analyst or associate when you begin.
The course has also been popular among lawyers and restructuring consultants who are just interested in the mechanics behind how restructuring works from the investment banking side of things.
If you'd like to check it out, you can do so here.
Best of luck in your interviews or in further learning about restructuring!