Restructuring Technical Interviews: Distressed Debt, Bankruptcy, and Turnaround Questions

The interviewer slides a case across the table: "A retail company has $500 million in debt, $50 million in EBITDA, and a debt maturity in six months. Walk me through the options."

This is restructuring. When healthy companies can't pay their bills, someone needs to figure out what happens next. Restructuring bankers advise companies on fixing their balance sheets. Distressed investors buy debt at discounts, betting on recovery. Both roles require a specific technical toolkit that general finance interviews never cover.

Here's everything you need to know for restructuring technical interviews—the concepts, calculations, and case frameworks that separate prepared candidates from everyone else.

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Why Restructuring Is Different

The Fundamental Problem

Restructuring exists because companies sometimes borrow more than they can repay. When that happens, someone takes a loss. The question is who.

Healthy company finance: How do we maximize value for shareholders?

Restructuring finance: How do we divide limited value among competing creditors?

This shift in focus changes everything. In restructuring, equity is often worthless. The real negotiation happens among debt holders—senior lenders, bondholders, trade creditors—each fighting for a larger share of what remains.

The Two Sides

Restructuring advisory (sell-side):

• Advises distressed companies on fixing balance sheets
• Negotiates with creditors on behalf of the company
• Explores all options: refinancing, asset sales, bankruptcy
• Key players: Houlihan Lokey, PJT Partners, Lazard, Moelis, Evercore

Distressed investing (buy-side):

• Purchases debt or equity at discounted prices
• Bets on recovery value exceeding purchase price
• May take active role in restructuring negotiations
• Key players: Apollo, Oaktree, Elliott, Baupost, Centerbridge

Both sides need the same technical foundation. They just apply it differently.

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Core Concepts You Must Know

The Capital Structure

Understanding capital structure priority is fundamental to restructuring.

Order of payment (senior to junior):

1. Secured debt: Backed by specific collateral (real estate, equipment, inventory)
2. Senior unsecured debt: No collateral, but paid before subordinated debt
3. Subordinated debt: Contractually junior to senior debt
4. Mezzanine/PIK: Often includes equity features (warrants, conversion rights)
5. Preferred equity: Equity with priority over common
6. Common equity: Last in line, first to be wiped out

The fulcrum security: The debt tranche where recovery drops below 100%. This is where the real action happens in restructuring negotiations.

Absolute Priority Rule

In bankruptcy, creditors must be paid in order of priority. Senior claims get paid in full before junior claims receive anything.

The reality: Negotiated settlements often deviate from strict absolute priority. Junior creditors may receive something to avoid litigation or accelerate the process. But the rule establishes the baseline for all negotiations.

Liquidity vs. Solvency

Two different kinds of distress:

Liquidity crisis: Company is profitable but can't meet near-term obligations. The business works; the balance sheet needs time.

Solvency crisis: Company's liabilities exceed asset values. The business may be fundamentally broken.

The distinction matters for solutions:

• Liquidity problems might be solved with new financing
• Solvency problems require debt reduction

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Key Restructuring Metrics

Leverage Ratios

Total Debt / EBITDA: Overall leverage. Distressed companies often have ratios of 6x or higher.

Net Debt / EBITDA: Accounts for cash on hand. More relevant for companies with significant cash positions.

Senior Debt / EBITDA: Leverage through senior secured. Important for assessing secured lender recovery.

Coverage Ratios

Interest Coverage (EBITDA / Interest Expense): Below 1.0x means the company can't cover interest from operations. Below 1.5x is concerning.

Fixed Charge Coverage: EBITDA divided by all fixed charges (interest, required principal, capex, rent). More comprehensive than interest coverage alone.

Cash Interest Coverage: EBITDA divided by cash interest only (excludes PIK interest). Reflects actual cash burden.

Liquidity Metrics

Cash Burn Rate: Monthly or weekly cash consumption. Critical for assessing runway.

Days Cash on Hand: Current cash divided by daily cash burn. How long until the company runs out?

Revolver Availability: Undrawn capacity on revolving credit facility. Often the last source of liquidity.

Recovery Analysis Metrics

Loan-to-Value (LTV): Debt divided by enterprise value. Shows how much of the capital structure is impaired.

Recovery Rate: What creditors receive as a percentage of their claim. Varies dramatically by seniority.

Fulcrum Security: The debt tranche that receives partial recovery—below 100% but above 0%.

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Restructuring Options

Out-of-Court Solutions

Refinancing: Replace maturing debt with new debt. Works when the company has market access.

Extension/Amendment: Negotiate with existing lenders for extended maturities or covenant relief. Lenders may prefer this to bankruptcy.

Exchange Offer: Offer existing bondholders new securities (often with reduced principal) in exchange for their current bonds. Requires bondholder consent.

Asset Sales: Sell non-core assets to generate cash for debt paydown. May require lender approval.

Debt Buybacks: Repurchase debt at market prices (below par). Reduces debt burden if the company has cash.

In-Court Solutions (Bankruptcy)

Chapter 11 Reorganization:

• Company continues operating
• Automatic stay stops creditor collection
• Debtor-in-possession (DIP) financing provides new liquidity
• Plan of reorganization distributes value to creditors
• Company emerges with cleaner balance sheet

Chapter 7 Liquidation:

• Business operations cease
• Assets sold piecemeal
• Proceeds distributed to creditors by priority
• Typically lower recovery than reorganization

363 Sale:

• Assets sold during bankruptcy (Section 363 of Bankruptcy Code)
• Buyer acquires assets free of liabilities
• Faster than full reorganization
• Often used for companies where going-concern value is preserved by speed

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Valuation in Restructuring

Enterprise Value Approaches

DCF with restructuring considerations:

• Lower revenue projections reflecting distressed operations
• Margin assumptions based on turnaround plan
• Higher discount rate reflecting execution risk
• Explicit modeling of restructuring costs

Comparable companies:

• Select comps carefully—distressed companies aren't comparable to healthy ones
• EV/EBITDA multiples often lower than industry averages
• Consider distressed comps if available

Precedent transactions:

• 363 sales of similar companies
• Emergence valuations of restructured competitors
• Strategic acquisitions of distressed assets

Liquidation analysis:

• Value assets individually
• Apply recovery rates by asset type:
  • A/R: 70-90%
  • Inventory: 50-70%
  • PP&E: 20-50%
  • Intangibles: 0-20%
• Sum values and subtract administrative costs

Waterfall Analysis

The waterfall shows how enterprise value gets distributed across the capital structure.

Sample waterfall:

Claim	Amount	Cumulative	Recovery
Administrative claims	$50M	$50M	100%
DIP financing	$100M	$150M	100%
First lien debt	$300M	$450M	100%
Second lien debt	$200M	$650M	75%
Unsecured bonds	$250M	$900M	0%
Equity	—	—	0%

Enterprise value: $600M

In this example, second lien debt is the fulcrum security—partially recovered, partially impaired.

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Common Interview Questions

Conceptual Questions

"What is a restructuring?"

A restructuring is the process of reorganizing a company's capital structure to address financial distress. This typically involves reducing debt through negotiation or bankruptcy, extending maturities, converting debt to equity, or selling assets. The goal is to create a sustainable capital structure that allows the company to operate going forward.

"Walk me through what happens when a company files for Chapter 11."

First, an automatic stay takes effect, halting all creditor collection efforts. The company files schedules listing all assets, liabilities, and executory contracts.

The company seeks debtor-in-possession (DIP) financing to fund operations during bankruptcy. It forms committees—typically an unsecured creditors' committee—to represent stakeholder interests.

The company operates the business while developing a plan of reorganization. This plan specifies how each creditor class will be treated. Creditors vote on the plan by class.

If approved, the plan gets confirmed by the court. The company emerges from bankruptcy with a new capital structure and ownership, typically controlled by the fulcrum security holders who converted debt to equity.

"What is the absolute priority rule?"

The absolute priority rule requires that senior creditors be paid in full before junior creditors receive any recovery. In a bankruptcy waterfall, each class must be fully satisfied before the next class receives value.

In practice, junior creditors sometimes receive recovery even when senior creditors aren't fully paid—usually to avoid litigation or gain their support for a reorganization plan. But the rule establishes the negotiating framework.

"What's the difference between Chapter 11 and Chapter 7?"

Chapter 11 is reorganization. The company continues operating, restructures its debt, and emerges as a going concern. This typically maximizes value because operating businesses are worth more than liquidated assets.

Chapter 7 is liquidation. Operations cease, assets are sold, and proceeds are distributed to creditors. This is typically a last resort when the business has no viable path forward.

Companies may convert from Chapter 11 to Chapter 7 if reorganization fails.

Technical Questions

"How do you calculate the fulcrum security?"

First, estimate enterprise value through DCF, comps, or precedent transactions. Then build a waterfall showing cumulative claims in priority order.

The fulcrum security is the tranche where cumulative claims exceed enterprise value. In that tranche, some creditors receive partial recovery; none receive full recovery.

For example: If EV is $500M, administrative claims are $25M, senior secured is $300M, and subordinated debt is $300M, the fulcrum is the subordinated debt. Senior secured gets 100% recovery ($300M / $300M). Subordinated gets 58% recovery (($500M - $25M - $300M) / $300M).

"A company has 5x leverage and 1.2x interest coverage. What are the options?"

The company is surviving but vulnerable. 1.2x interest coverage means it's barely paying interest from operations. Any hiccup in EBITDA could trigger default.

Options depend on maturity timing and lender willingness:

1. Refinancing: If markets are open and lenders are willing, extend maturities to buy time
2. Amendment: Negotiate covenant relief and possibly maturity extension with existing lenders
3. Equity raise: Dilutive but deleverages the balance sheet
4. Asset sales: Reduce debt with sale proceeds
5. Operational turnaround: If there's a clear path to EBITDA improvement, execute it
6. Exchange offer: Offer bondholders new securities with lower principal
7. Prepackaged bankruptcy: If out-of-court fails, negotiate a consensual restructuring in bankruptcy

The right answer depends on the company's specific situation—liquidity runway, lender relationships, operational outlook.

"How does DIP financing work?"

DIP (debtor-in-possession) financing provides liquidity to companies operating in Chapter 11. It's secured debt with priority over all pre-petition claims.

DIP lenders receive:

• Superpriority administrative claim status
• First-priority lien on assets
• Fees and enhanced economics reflecting risk
• Covenants and milestones governing the case

Because of these protections, DIP financing is generally the safest debt in a bankruptcy. The company needs it to operate, and the court prioritizes repayment.

Pre-petition secured lenders often provide DIP financing to protect their position and maintain control.

Case Study Format

"A retailer has $600M in debt (first lien: $400M, bonds: $200M), $80M EBITDA, and first lien maturity in 18 months. Walk me through the analysis."

Step 1: Assess the situation

• Leverage: 7.5x ($600M / $80M)
• Interest (assume 8% blended): $48M annually
• Interest coverage: 1.7x ($80M / $48M)
• Coverage is adequate but leverage is high

Step 2: Estimate enterprise value

• Distressed retail typically trades at 4-6x EBITDA
• Using 5x: EV = $400M
• First lien: 100% recovery ($400M)
• Bonds: 0% recovery (EV exhausted by first lien)

Step 3: Evaluate options

Out-of-court:

• Refinancing unlikely at 7.5x leverage in distressed retail
• Bond exchange: Offer bondholders 50% of a reorganized company's equity for their claims
• Asset sales: If non-core assets exist, use proceeds to reduce first lien

In-court:

• Prepackaged bankruptcy: Negotiate with bondholders pre-filing
• 363 sale: If a strategic buyer exists, sell going concern quickly
• Full Chapter 11: If negotiations stall

Step 4: Recommend an approach

Given the bondholders are the fulcrum security with current recovery near zero, they'll likely control the reorganization. The best outcome is a consensual exchange offer that converts their debt to equity while extending first lien maturities. If that fails, a prepackaged Chapter 11 achieves the same result with legal process.

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Distressed Debt Investing Concepts

Distressed Debt Strategies

Loan-to-own: Purchase fulcrum security at a discount, control the restructuring, convert debt to equity, own the reorganized company.

Trading: Buy and sell distressed debt based on price movements. Less focused on ultimate recovery.

Rescue financing: Provide DIP or exit financing to companies in bankruptcy. Lower risk, lower return.

Distressed-for-control: Similar to loan-to-own but may involve all tranches. Goal is to own the company post-restructuring.

Distressed Pricing

Distressed debt trades at significant discounts to par value:

Price Range	Implied Recovery	Trading Dynamic
90-100	Near par	Performing with concerns
70-90	Partial impairment	Stressed but not distressed
40-70	Significant impairment	Distressed
20-40	Severe impairment	Deep distress
0-20	Likely wipeout	Trading value only

Returns come from:

• Price appreciation as situation improves
• Interest/coupon payments while holding
• Conversion to equity through restructuring
• Call protection and premiums

Credit Agreement Provisions

Distressed investors scrutinize credit agreements for leverage:

Covenant analysis: What triggers default? How much headroom exists?

Intercreditor agreements: How do different debt tranches interact? Can senior lenders block junior actions?

Change of control provisions: What happens if ownership changes?

Priming provisions: Can existing debt be subordinated by new debt?

Stripping provisions: Can guarantees or collateral be released?

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What Makes Restructuring Interviews Different

The Mindset Shift

Regular finance interviews test whether you can value healthy companies. Restructuring interviews test whether you can think like a creditor protecting value in adversarial situations.

Key differences:

• Focus on downside scenarios, not upside potential
• Emphasis on legal rights and contractual provisions
• Multi-party negotiations, not single-buyer/seller transactions
• Timeline pressure from liquidity constraints

What Interviewers Look For

Technical foundation: Can you build a waterfall? Do you understand priority?

Commercial judgment: What options make sense? What's negotiable?

Communication: Can you explain complex situations clearly?

Interest in distress: Why do you want this? The work is intense and situations are messy.

Preparation Priorities

1. Master the waterfall: Practice building recovery waterfalls until it's automatic
2. Know the options: Understand the full toolkit of restructuring solutions
3. Study real cases: Read about actual restructurings (Toys R Us, PG&E, Hertz, Purdue Pharma)
4. Understand bankruptcy: Chapter 11 process, DIP financing, plan confirmation
5. Learn credit analysis: Focus on covenant analysis and credit agreement provisions

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Sample Practice Problem

The Setup: A healthcare company has the following capital structure:

• First lien term loan: $250M at L+400
• Second lien notes: $150M at 9%
• Unsecured bonds: $200M at 7%
• LTM EBITDA: $60M
• Cash: $20M
• First lien matures in 14 months

Questions:

1. Calculate total leverage and net leverage
2. Estimate interest coverage
3. If healthy healthcare companies trade at 7x EBITDA and distressed at 5x, what's the likely recovery for each tranche?
4. What restructuring options would you recommend?

Answers:

1. Leverage:

   • Total debt: $600M
   • Total leverage: 10x ($600M / $60M)
   • Net leverage: 9.7x (($600M - $20M) / $60M)

2. Interest coverage:

   • First lien interest: $250M × 5% (assume L = 100bps) = $12.5M
   • Second lien interest: $150M × 9% = $13.5M
   • Unsecured interest: $200M × 7% = $14M
   • Total interest: $40M
   • Coverage: 1.5x ($60M / $40M)

3. Recovery analysis:

   • Distressed EV at 5x: $300M
   • First lien: 100% ($250M / $250M)
   • Second lien: 33% (($300M - $250M) / $150M)
   • Unsecured: 0%

4. Recommendations:

   • At 10x leverage with first lien maturing in 14 months, refinancing the entire structure is unlikely
   • Second lien is the fulcrum—they'll control the restructuring
   • Recommend: Negotiate with second lien holders for debt-to-equity conversion
   • Extend first lien maturities (they're fully covered, so should cooperate)
   • Wipe out unsecured and equity
   • If negotiations fail, pursue prepackaged Chapter 11

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Key Takeaways

Restructuring interviews test specialized knowledge that general finance prep doesn't cover.

Master these concepts:

• Capital structure priority and absolute priority rule
• Chapter 11 process and key milestones
• Fulcrum security identification
• DIP financing mechanics

Know these metrics:

• Leverage ratios (total, net, senior)
• Coverage ratios (interest, fixed charge)
• Liquidity measures (burn rate, runway)
• Recovery rates by seniority

Practice these skills:

• Building recovery waterfalls
• Analyzing restructuring options
• Walking through case studies
• Explaining bankruptcy process

The key insight: Restructuring is about dividing value among creditors when there isn't enough to go around. Technical skills establish who has claims to what. Commercial judgment determines how to resolve the competing interests. The best candidates demonstrate both.

The work is complex, adversarial, and high-stakes. Interviewers want to see that you understand that—and that you're excited by it anyway.