Walk me through LBO debt covenants.
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Maintenance covenants (tested quarterly): Net Debt/EBITDA below 5.5x, Interest Coverage >2.0x, Capex limits. Breach = technical default. Incurrence covenants (tested only when new debt is taken): can only incur more debt if leverage below specified level. Senior lenders want maintenance; borrowers prefer incurrence-only (more flexibility). Covenant-lite (cov-lite) deals have become common — dangerous in a downturn.
WHAT INTERVIEWERS LISTEN FOR
- ✓Maintenance vs incurrence covenants
- ✓Net Debt/EBITDA and Interest Coverage
- ✓Technical default on breach
- ✓Covenant-lite risks in downturn
COMMON MISTAKES
- ✗Confusing maintenance and incurrence
- ✗Ignoring quarterly testing frequency
- ✗Treating cov-lite as always safe
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