Restructuring interview questions and how to answer them

Restructuring groups interview differently from M&A groups. The questions assume a company that cannot pay its debts, so the focus moves from growth and synergies to who gets paid, in what order, and with what.

Where these questions come up

PJT Partners (its restructuring group is known for the most technical interviews in the industry), Houlihan Lokey, Lazard, Evercore, Moelis and Rothschild & Co all run dedicated restructuring or debt advisory teams. Expect the topics below at each, at varying depth.

The core ideas

Priority of claims. Secured debt is paid before unsecured debt, which is paid before preferred and common equity. Within a class, creditors are treated equally.

The waterfall. Take the value of the business, then pay each class in order until the value runs out. Practise doing this in your head with round numbers.

The fulcrum security. The class where the value runs out. Holders of it are only partly repaid, so they usually receive most of the equity in the reorganised company. Identifying it is the most common restructuring question.

Distressed valuation. You still use comparable companies, precedent transactions and a DCF, but on a normalised earnings figure, and you compare the result with a liquidation value.

Questions to prepare

• A company has 100 of enterprise value, 60 of secured debt, 80 of unsecured bonds and equity. Who gets what, and which is the fulcrum security? (Secured gets 60, unsecured gets 40 or 50 cents on the dollar, equity gets nothing; the unsecured bonds are the fulcrum.)
• What options does a company have when it cannot meet a debt payment? (Amend and extend, exchange offers, new money, asset sales, a debt-for-equity swap, or a court-supervised process.)
• Why might a bond trading at 50 still be a good investment?
• What is the difference between an out-of-court deal and a formal insolvency process?
• How do you value a company with negative earnings?

How to prepare

Learn the standard technical questions first, because restructuring interviews still ask them. Then read one recent restructuring in the news and be ready to explain the capital structure before and after.