Private Credit terms

62
terms

Credit and restructuring17

Absolute priority rule: In bankruptcy, each class of claims is paid in full before the next one gets anything: secured debt, then unsecured debt, then preferred stock, then common equity. Negotiated settlements often bend it in practice.ExampleA bankrupt company is worth $500m. Secured lenders owed $400m are paid in full, unsecured holders owed $300m split the remaining $100m, about 33 cents on the dollar, and shareholders get nothing.See also Chapter 11, Distressed debt, Debtor-in-possession financing
Chapter 11: The part of the US Bankruptcy Code that lets a company keep operating while it reorganizes its debts under court supervision. Creditors usually recover less than they are owed, and existing shareholders are often wiped out. Chapter 7 is liquidation.ExampleA retailer with $2bn of debt files Chapter 11 and keeps its stores open. It exits a year later with $800m of debt; the old bondholders own the new equity and the old shareholders get nothing.See also Debtor-in-possession financing, Absolute priority rule, Distressed debt
Covenant: A promise in a loan or bond agreement. Maintenance covenants are tested on a schedule, such as keeping debt/EBITDA under 5.0x every quarter; incurrence covenants are tested only when the borrower does something, like taking on more debt.ExampleA loan requires debt/EBITDA under 5.0x each quarter. With $450m of debt, EBITDA falling from $100m to $85m takes leverage from 4.5x to about 5.3x, and the covenant is breached.See also Covenant-lite, Leverage ratio
Covenant-lite (cov-lite): A loan with no maintenance covenants, only incurrence covenants. It is now standard for large leveraged loans, which gives borrowers more room and lenders less early warning.ExampleEBITDA falls 30% at a covenant-lite borrower. Nothing is breached, so lenders cannot step in; they get a say only when the company tries to borrow more or misses a payment.See also Covenant, Direct lending
Credit rating (investment grade): A grade from an agency such as S&P, Moody's, or Fitch on how likely a borrower is to default. BBB- at S&P (Baa3 at Moody's) and above is investment grade; anything lower is high yield.ExampleAn issuer cut from BBB- to BB+ falls out of investment grade. Funds that may hold only investment grade bonds have to sell, and its spread can widen sharply in days.See also High-yield bond, Credit spread
Credit spread: The extra yield a bond pays over a Treasury of similar maturity, to compensate for default risk and lower liquidity. A corporate bond yielding 6.5% when the matching Treasury yields 4.5% has a 200 basis point spread.ExampleA five-year BB bond yields 7.25% while the five-year Treasury yields 4.00%: a 325 bp spread. If spreads tighten 50 bps with Treasuries unchanged, the bond yields 6.75%.See also Basis point, Credit rating, Yield to maturity
Debtor-in-possession financing (DIP financing, DIP loan): A loan that funds a company through its Chapter 11 case. The court gives it priority over most existing debt, which is why lenders are willing to lend to a company that is already bankrupt.ExampleA bankrupt manufacturer needs $150m to pay suppliers and staff during its case. A DIP lender provides it at SOFR + 7%, ahead of the old unsecured bonds, so its repayment is close to certain.See also Chapter 11, Absolute priority rule
Direct lending: Loans made straight to companies, often PE-owned middle market businesses, by private credit funds instead of banks. Lenders earn higher spreads in exchange for holding loans that are hard to sell, and deals close faster with fewer parties.ExampleA private credit fund lends $250m to a PE-owned software company at SOFR + 5.5% and closes in three weeks. A syndicated bank loan might price lower but take longer and need ratings and a marketing process.See also Unitranche, Covenant-lite, Sponsor
Distressed debt: Bonds or loans of companies in or near default, trading well below face value. Distressed investors buy them to profit from the recovery or to take control of the company through a restructuring.ExampleA bond trades at 40 cents on the dollar, and you think a restructuring recovers 60 cents. Buying $10m of face value for $4m and receiving $6m of value is a 50% gain.See also Chapter 11, Absolute priority rule, Yield to maturity
High-yield bond (junk bond, HY): A bond rated below investment grade, meaning below BBB- at S&P. It pays more interest because default risk is higher, and it is often issued to fund leveraged buyouts.ExampleA sponsor funds an LBO with $500m of 8-year B-rated bonds at 8.5% while investment grade bonds of similar maturity pay 5.5%. The 300 bp gap is the price of the extra default risk.See also Credit rating, Credit spread, Leveraged buyout
Interest coverage ratio: EBITDA (or EBIT) divided by interest expense. A company with $100 million of EBITDA and $25 million of interest has 4.0x coverage. The lower it gets, the less cushion lenders have if earnings fall.ExampleEBITDA of $60m and $20m of interest is 3.0x coverage. If floating rates rise and interest climbs to $30m, coverage falls to 2.0x.See also Leverage ratio, EBITDA
Leverage ratio (debt/EBITDA): Total debt divided by EBITDA, the first number a credit investor looks at. $600 million of debt on $100 million of EBITDA is 6.0x. Net leverage subtracts cash from debt first.ExampleA company with $500m of debt, $100m of cash, and $80m of EBITDA has total leverage of 6.25x and net leverage of ($500m - $100m) / $80m = 5.0x.See also Interest coverage ratio, Covenant, EBITDA
Mezzanine debt (mezz): Debt that ranks below senior loans but above equity. It pays a higher rate, often partly in kind, and sometimes comes with warrants. It fills the gap when senior lenders will not lend enough.ExampleSenior lenders will fund 4.0x EBITDA of a deal that needs 6.0x of debt. A mezzanine fund provides the other 2.0x at 12% cash interest plus 2% PIK, with warrants for 5% of the equity.See also Payment in kind, Unitranche, Absolute priority rule
Payment in kind (PIK): Interest paid by adding it to the loan balance instead of paying cash. A $100 million note with 10% PIK interest owes $110 million after a year. It saves the borrower cash today at the cost of a growing debt.ExampleA $200m note at 12% PIK, compounding annually, owes $224m after one year and about $281m after three, with no cash interest paid along the way.See also Mezzanine debt, Direct lending
Revolving credit facility (revolver, RCF): A credit line a company can draw, repay, and draw again up to a limit, like a business credit card. It usually ranks senior and covers working capital needs and emergencies.ExampleA retailer has a $200m revolver. It draws $120m in October to buy holiday inventory and repays it in January from holiday sales, so the full $200m is available again.See also Covenant, Net working capital
Unitranche: One loan that combines senior and junior debt into a single facility at a blended rate, usually provided by a direct lender. Borrowers like the simplicity and speed of one lender group.ExampleInstead of a $200m first-lien loan at SOFR + 4% and a $100m second-lien loan at SOFR + 8%, a direct lender provides one $300m unitranche loan at SOFR + 5.5%.See also Direct lending, Mezzanine debt
Yield to maturity (YTM): The annual return a bondholder earns buying at today's price and holding to maturity, assuming every payment is made. Price and yield move in opposite directions, so a bond bought below par yields more than its coupon.ExampleA one-year bond with a 5% coupon trades at 98 and pays 105 at maturity. Its yield to maturity is 105 / 98 - 1, about 7.1%, above the coupon because it was bought below par.See also Credit spread, Duration, Distressed debt

Accounting14

Accounts receivable: Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement
Accrual accounting: Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue
Amortization: The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA
Balance sheet: A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill
Capital expenditures (capex, CapEx): Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement
Cash flow statement: Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital
Depreciation: Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA
EBITDA: Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio
Gross margin: Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics
Income statement: Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet
Levered free cash flow (LFCF, free cash flow to equity, FCFE): Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout
Net income: The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement
Net working capital (NWC): Operating current assets minus operating current liabilities, usually receivables plus inventory minus payables and accrued expenses, with cash and debt left out. When it grows, cash gets tied up in the business, so free cash flow falls by the increase.ExampleReceivables of $50m plus inventory of $30m minus payables of $35m gives NWC of $45m. If it grows to $55m next year, the $10m increase comes out of free cash flow.See also Accounts receivable, Unlevered free cash flow, Deferred revenue
Operating income (EBIT): Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow

Recruiting12

Buy side: Firms that invest money: private equity, hedge funds, asset managers, private credit, and venture capital. They buy the securities, research, and services the sell side offers.ExampleA sell-side analyst publishes a buy rating on a retailer. A buy-side analyst at a mutual fund reads it, builds her own model, and decides whether to put $50m of the fund's money into the stock.See also Sell side, Private equity, Hedge fund
Coffee chat (informational interview): A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview
Diversity program: An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst
Fit interview (behavioral interview): The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue
HireVue: A recorded video interview platform. You see a question, get a short time to prepare, often about 30 seconds, then answer on camera within a time limit. Many banks use it as the first screen after the application.ExampleTell me about a time your team disagreed. You get 30 seconds to think, two minutes to answer, and one take before the next question appears.See also Fit interview, Online assessment, Superday
Middle market: Banks and funds that work on smaller deals, often for companies worth under roughly $1 billion. Upper middle market banks, such as Houlihan Lokey, William Blair, and Baird, sit between them and the bulge brackets.ExampleA middle-market bank advises the founder of an HVAC business with $40m of EBITDA on a sale to a PE firm at about 10x, a $400m deal too small for most bulge bracket teams.See also Bulge bracket, Elite boutique, Direct lending
Networking: Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting
Return offer: A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer
Rolling admissions (rolling applications, rolling basis): Reviewing applications as they arrive and filling seats before the posted deadline. Applying in the first week or two after a program opens can matter more than the deadline itself.ExampleA program opens January 10 with a March 1 deadline. If most interview slots fill by mid-February, an application sent February 20 arrives after most of the decisions are made.See also Summer analyst, Online assessment
Summer analyst: The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday
Superday: The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue
Technical interview: Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Markets and macro6

Basis point (bps): One hundredth of a percentage point, or 0.01%. A rate that moves from 4.25% to 4.50% has risen 25 basis points.ExampleA loan priced at SOFR + 350 bps with SOFR at 4.30% pays 7.80%. On a $100m loan, each basis point is worth $10,000 a year.See also DV01, Credit spread
Federal funds rate (fed funds): The overnight rate at which banks lend reserves to each other, which the Federal Reserve steers within a target range. It anchors short-term borrowing costs across the economy.ExampleThe FOMC cuts the target range from 4.25% to 4.50% down to 4.00% to 4.25%. Loans priced off SOFR reset about 25 bps lower within days, and money market fund yields follow.See also Federal Open Market Committee, Secured Overnight Financing Rate, Yield curve
Inverted yield curve: When short-term Treasury yields are above long-term ones, for example the 2-year yielding more than the 10-year. It has come before most US recessions, though the lag is long and varies.ExampleThe 2-year Treasury yields 4.8% and the 10-year yields 4.2%, so the 2s10s spread is -60 bps. The curve is inverted.See also Yield curve, Treasury securities
Secured Overnight Financing Rate (SOFR): The benchmark US overnight rate, based on Treasury repo trades and published by the New York Fed. It replaced LIBOR, so most US floating-rate loans now pay SOFR plus a spread.ExampleA leveraged loan pays SOFR + 3.25%. With SOFR at 4.30% the borrower pays 7.55%; if SOFR falls to 3.80%, the rate drops to 7.05% with no new paperwork.See also Repo, Interest rate swap, Federal funds rate
Treasury securities (Treasuries): Debt issued by the US government: bills (one year or less), notes (2 to 10 years), and bonds (20 and 30 years). Their yields are the risk-free benchmark most other assets are priced against.ExampleA 3-month bill bought at $98.90 pays $100 at maturity: $1.10 of interest, about 4.4% a year. A 10-year note pays a coupon every six months instead and returns its face value at maturity.See also Yield curve, Credit spread, Duration
Yield curve: A chart of Treasury yields across maturities, from one month to 30 years. It normally slopes upward because lenders want more return for locking money up longer.ExampleThe 2-year at 3.5%, the 10-year at 4.2%, and the 30-year at 4.7% make a normal, upward-sloping curve. The 10-year minus the 2-year, 70 bps, is the 2s10s spread traders quote.See also Inverted yield curve, Treasury securities, Federal funds rate

LBOs and private equity5

Dividend recapitalization (dividend recap): A PE-owned company borrows new debt and pays the proceeds to its owners as a dividend. It returns cash early and lifts IRR, but leaves the company carrying more leverage.ExampleA company with $100m of EBITDA and $400m of debt borrows $200m more and pays it to its sponsor as a dividend. The sponsor gets cash back early and IRR rises; leverage goes from 4.0x to 6.0x.See also Internal rate of return, Leverage ratio, Leveraged buyout
Internal rate of return (IRR): The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO
Leveraged buyout (LBO, buyout): Buying a company with a large share of borrowed money, often around half the price, and using the company's own cash flow to pay the debt down. Returns come from EBITDA growth, debt paydown, and any multiple expansion.ExampleBuy a company with $100m of EBITDA at 10x, $1bn, with $500m of debt and $500m of equity. Exit in five years at 10x $150m of EBITDA, $1.5bn, with $300m of debt left: equity is $1.2bn, a 2.4x MOIC.See also Sources and uses, Internal rate of return, Sponsor, Paper LBO
Sources and uses: The table at the top of an LBO or merger model. Uses are what the money pays for (the equity purchase price, refinanced debt, fees); sources are where it comes from (new debt, sponsor equity, rollover). The two totals must match.ExampleUses: $800m to buy the equity, $200m to refinance debt, $30m of fees, $1,030m in total. Sources: $550m of new debt, $430m of sponsor equity, $50m of rollover, also $1,030m.See also Leveraged buyout, Rollover equity
Sponsor (financial sponsor): A private equity firm or similar investor that buys companies with its funds' capital plus debt. Banks run sponsor coverage groups because PE firms are among their largest fee payers.ExampleA sponsor buying a $1.5bn company calls three banks for the debt financing. Those leveraged finance fees, plus the sale fee when it exits years later, are why banks staff sponsor coverage teams.See also Private equity, Leveraged buyout, Coverage group

M&A and deals4

Confidential information memorandum (CIM): The detailed marketing book a sell-side banker writes about a company for sale, covering the business, its market, management, and financials. Buyers receive it after signing a nondisclosure agreement.ExampleOn the sale of a $300m packaging company, the analyst spends three weeks on a 60-page CIM: business overview, customer mix, five years of historical financials, and management's projections.See also Teaser, Sell-side process, Data room
Data room (virtual data room, VDR): A secure online folder where a seller posts contracts, financials, and other documents for buyers to diligence. Access is tracked, and it usually opens in the later rounds of a sale.ExampleIn round two of a sale, the buyer's lawyers and accountants get logins to a data room with 2,000 documents: customer contracts, leases, tax returns, monthly financials. The seller sees who opened what.See also Due diligence, Sell-side process
Due diligence: The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent
Underwriting: A bank's role in a securities offering: it commits to buy or sell the shares or bonds, markets them to investors, and takes on risk in exchange for a fee called the underwriting spread.ExampleBanks agree to buy $1bn of bonds at 99.0 and sell them to investors at 100.0. The 1 point is a $10m spread; if demand is weak and they have to sell below 99.0, they take the loss.See also Initial public offering, Follow-on offering, High-yield bond

Valuation2

Enterprise value (EV, TEV): The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow
EV/EBITDA multiple (EV/EBITDA): Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis

Trading and products2

Duration (modified duration): A bond's sensitivity to interest rates: the approximate percent price change for a one percentage point move in yield. A bond with a duration of 7 falls about 7% if yields rise 1%.ExampleA $20m bond position with a duration of 5 loses about $1m if yields rise 1%, and gains about $200,000 if they fall 20 bps.See also DV01, Convexity, Treasury securities
Interest rate swap: A contract to exchange fixed-rate interest payments for floating-rate ones on a notional amount. A company with a SOFR-based loan can pay fixed and receive floating on a swap to lock in its borrowing cost.ExampleA company with a $100m loan at SOFR + 2% enters a swap where it pays 3.8% fixed and receives SOFR. The SOFR legs cancel, so its all-in cost is locked at 5.8% whatever SOFR does.See also Secured Overnight Financing Rate, DV01, FICC

Credit and restructuring17

Absolute priority rule

In bankruptcy, each class of claims is paid in full before the next one gets anything: secured debt, then unsecured debt, then preferred stock, then common equity. Negotiated settlements often bend it in practice.ExampleA bankrupt company is worth $500m. Secured lenders owed $400m are paid in full, unsecured holders owed $300m split the remaining $100m, about 33 cents on the dollar, and shareholders get nothing.See also Chapter 11, Distressed debt, Debtor-in-possession financing

Chapter 11

The part of the US Bankruptcy Code that lets a company keep operating while it reorganizes its debts under court supervision. Creditors usually recover less than they are owed, and existing shareholders are often wiped out. Chapter 7 is liquidation.ExampleA retailer with $2bn of debt files Chapter 11 and keeps its stores open. It exits a year later with $800m of debt; the old bondholders own the new equity and the old shareholders get nothing.See also Debtor-in-possession financing, Absolute priority rule, Distressed debt

Covenant

A promise in a loan or bond agreement. Maintenance covenants are tested on a schedule, such as keeping debt/EBITDA under 5.0x every quarter; incurrence covenants are tested only when the borrower does something, like taking on more debt.ExampleA loan requires debt/EBITDA under 5.0x each quarter. With $450m of debt, EBITDA falling from $100m to $85m takes leverage from 4.5x to about 5.3x, and the covenant is breached.See also Covenant-lite, Leverage ratio

Covenant-lite (cov-lite)

A loan with no maintenance covenants, only incurrence covenants. It is now standard for large leveraged loans, which gives borrowers more room and lenders less early warning.ExampleEBITDA falls 30% at a covenant-lite borrower. Nothing is breached, so lenders cannot step in; they get a say only when the company tries to borrow more or misses a payment.See also Covenant, Direct lending

Credit rating (investment grade)

A grade from an agency such as S&P, Moody's, or Fitch on how likely a borrower is to default. BBB- at S&P (Baa3 at Moody's) and above is investment grade; anything lower is high yield.ExampleAn issuer cut from BBB- to BB+ falls out of investment grade. Funds that may hold only investment grade bonds have to sell, and its spread can widen sharply in days.See also High-yield bond, Credit spread

Credit spread

The extra yield a bond pays over a Treasury of similar maturity, to compensate for default risk and lower liquidity. A corporate bond yielding 6.5% when the matching Treasury yields 4.5% has a 200 basis point spread.ExampleA five-year BB bond yields 7.25% while the five-year Treasury yields 4.00%: a 325 bp spread. If spreads tighten 50 bps with Treasuries unchanged, the bond yields 6.75%.See also Basis point, Credit rating, Yield to maturity

Debtor-in-possession financing (DIP financing, DIP loan)

A loan that funds a company through its Chapter 11 case. The court gives it priority over most existing debt, which is why lenders are willing to lend to a company that is already bankrupt.ExampleA bankrupt manufacturer needs $150m to pay suppliers and staff during its case. A DIP lender provides it at SOFR + 7%, ahead of the old unsecured bonds, so its repayment is close to certain.See also Chapter 11, Absolute priority rule

Direct lending

Loans made straight to companies, often PE-owned middle market businesses, by private credit funds instead of banks. Lenders earn higher spreads in exchange for holding loans that are hard to sell, and deals close faster with fewer parties.ExampleA private credit fund lends $250m to a PE-owned software company at SOFR + 5.5% and closes in three weeks. A syndicated bank loan might price lower but take longer and need ratings and a marketing process.See also Unitranche, Covenant-lite, Sponsor

Distressed debt

Bonds or loans of companies in or near default, trading well below face value. Distressed investors buy them to profit from the recovery or to take control of the company through a restructuring.ExampleA bond trades at 40 cents on the dollar, and you think a restructuring recovers 60 cents. Buying $10m of face value for $4m and receiving $6m of value is a 50% gain.See also Chapter 11, Absolute priority rule, Yield to maturity

High-yield bond (junk bond, HY)

A bond rated below investment grade, meaning below BBB- at S&P. It pays more interest because default risk is higher, and it is often issued to fund leveraged buyouts.ExampleA sponsor funds an LBO with $500m of 8-year B-rated bonds at 8.5% while investment grade bonds of similar maturity pay 5.5%. The 300 bp gap is the price of the extra default risk.See also Credit rating, Credit spread, Leveraged buyout

Interest coverage ratio

EBITDA (or EBIT) divided by interest expense. A company with $100 million of EBITDA and $25 million of interest has 4.0x coverage. The lower it gets, the less cushion lenders have if earnings fall.ExampleEBITDA of $60m and $20m of interest is 3.0x coverage. If floating rates rise and interest climbs to $30m, coverage falls to 2.0x.See also Leverage ratio, EBITDA

Leverage ratio (debt/EBITDA)

Total debt divided by EBITDA, the first number a credit investor looks at. $600 million of debt on $100 million of EBITDA is 6.0x. Net leverage subtracts cash from debt first.ExampleA company with $500m of debt, $100m of cash, and $80m of EBITDA has total leverage of 6.25x and net leverage of ($500m - $100m) / $80m = 5.0x.See also Interest coverage ratio, Covenant, EBITDA

Mezzanine debt (mezz)

Debt that ranks below senior loans but above equity. It pays a higher rate, often partly in kind, and sometimes comes with warrants. It fills the gap when senior lenders will not lend enough.ExampleSenior lenders will fund 4.0x EBITDA of a deal that needs 6.0x of debt. A mezzanine fund provides the other 2.0x at 12% cash interest plus 2% PIK, with warrants for 5% of the equity.See also Payment in kind, Unitranche, Absolute priority rule

Payment in kind (PIK)

Interest paid by adding it to the loan balance instead of paying cash. A $100 million note with 10% PIK interest owes $110 million after a year. It saves the borrower cash today at the cost of a growing debt.ExampleA $200m note at 12% PIK, compounding annually, owes $224m after one year and about $281m after three, with no cash interest paid along the way.See also Mezzanine debt, Direct lending

Revolving credit facility (revolver, RCF)

A credit line a company can draw, repay, and draw again up to a limit, like a business credit card. It usually ranks senior and covers working capital needs and emergencies.ExampleA retailer has a $200m revolver. It draws $120m in October to buy holiday inventory and repays it in January from holiday sales, so the full $200m is available again.See also Covenant, Net working capital

Unitranche

One loan that combines senior and junior debt into a single facility at a blended rate, usually provided by a direct lender. Borrowers like the simplicity and speed of one lender group.ExampleInstead of a $200m first-lien loan at SOFR + 4% and a $100m second-lien loan at SOFR + 8%, a direct lender provides one $300m unitranche loan at SOFR + 5.5%.See also Direct lending, Mezzanine debt

Yield to maturity (YTM)

The annual return a bondholder earns buying at today's price and holding to maturity, assuming every payment is made. Price and yield move in opposite directions, so a bond bought below par yields more than its coupon.ExampleA one-year bond with a 5% coupon trades at 98 and pays 105 at maturity. Its yield to maturity is 105 / 98 - 1, about 7.1%, above the coupon because it was bought below par.See also Credit spread, Duration, Distressed debt

Accounting14

Accounts receivable

Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement

Accrual accounting

Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue

Amortization

The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA

Balance sheet

A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill

Capital expenditures (capex, CapEx)

Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement

Cash flow statement

Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital

Depreciation

Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA

EBITDA

Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio

Gross margin

Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics

Income statement

Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet

Levered free cash flow (LFCF, free cash flow to equity, FCFE)

Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout

Net income

The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement

Net working capital (NWC)

Operating current assets minus operating current liabilities, usually receivables plus inventory minus payables and accrued expenses, with cash and debt left out. When it grows, cash gets tied up in the business, so free cash flow falls by the increase.ExampleReceivables of $50m plus inventory of $30m minus payables of $35m gives NWC of $45m. If it grows to $55m next year, the $10m increase comes out of free cash flow.See also Accounts receivable, Unlevered free cash flow, Deferred revenue

Operating income (EBIT)

Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow

Recruiting12

Buy side

Firms that invest money: private equity, hedge funds, asset managers, private credit, and venture capital. They buy the securities, research, and services the sell side offers.ExampleA sell-side analyst publishes a buy rating on a retailer. A buy-side analyst at a mutual fund reads it, builds her own model, and decides whether to put $50m of the fund's money into the stock.See also Sell side, Private equity, Hedge fund

Coffee chat (informational interview)

A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview

Diversity program

An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst

Fit interview (behavioral interview)

The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue

HireVue

A recorded video interview platform. You see a question, get a short time to prepare, often about 30 seconds, then answer on camera within a time limit. Many banks use it as the first screen after the application.ExampleTell me about a time your team disagreed. You get 30 seconds to think, two minutes to answer, and one take before the next question appears.See also Fit interview, Online assessment, Superday

Middle market

Banks and funds that work on smaller deals, often for companies worth under roughly $1 billion. Upper middle market banks, such as Houlihan Lokey, William Blair, and Baird, sit between them and the bulge brackets.ExampleA middle-market bank advises the founder of an HVAC business with $40m of EBITDA on a sale to a PE firm at about 10x, a $400m deal too small for most bulge bracket teams.See also Bulge bracket, Elite boutique, Direct lending

Networking

Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting

Return offer

A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer

Rolling admissions (rolling applications, rolling basis)

Reviewing applications as they arrive and filling seats before the posted deadline. Applying in the first week or two after a program opens can matter more than the deadline itself.ExampleA program opens January 10 with a March 1 deadline. If most interview slots fill by mid-February, an application sent February 20 arrives after most of the decisions are made.See also Summer analyst, Online assessment

Summer analyst

The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday

Superday

The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue

Technical interview

Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Markets and macro6

Basis point (bps)

One hundredth of a percentage point, or 0.01%. A rate that moves from 4.25% to 4.50% has risen 25 basis points.ExampleA loan priced at SOFR + 350 bps with SOFR at 4.30% pays 7.80%. On a $100m loan, each basis point is worth $10,000 a year.See also DV01, Credit spread

Federal funds rate (fed funds)

The overnight rate at which banks lend reserves to each other, which the Federal Reserve steers within a target range. It anchors short-term borrowing costs across the economy.ExampleThe FOMC cuts the target range from 4.25% to 4.50% down to 4.00% to 4.25%. Loans priced off SOFR reset about 25 bps lower within days, and money market fund yields follow.See also Federal Open Market Committee, Secured Overnight Financing Rate, Yield curve

Inverted yield curve

When short-term Treasury yields are above long-term ones, for example the 2-year yielding more than the 10-year. It has come before most US recessions, though the lag is long and varies.ExampleThe 2-year Treasury yields 4.8% and the 10-year yields 4.2%, so the 2s10s spread is -60 bps. The curve is inverted.See also Yield curve, Treasury securities

Secured Overnight Financing Rate (SOFR)

The benchmark US overnight rate, based on Treasury repo trades and published by the New York Fed. It replaced LIBOR, so most US floating-rate loans now pay SOFR plus a spread.ExampleA leveraged loan pays SOFR + 3.25%. With SOFR at 4.30% the borrower pays 7.55%; if SOFR falls to 3.80%, the rate drops to 7.05% with no new paperwork.See also Repo, Interest rate swap, Federal funds rate

Treasury securities (Treasuries)

Debt issued by the US government: bills (one year or less), notes (2 to 10 years), and bonds (20 and 30 years). Their yields are the risk-free benchmark most other assets are priced against.ExampleA 3-month bill bought at $98.90 pays $100 at maturity: $1.10 of interest, about 4.4% a year. A 10-year note pays a coupon every six months instead and returns its face value at maturity.See also Yield curve, Credit spread, Duration

Yield curve

A chart of Treasury yields across maturities, from one month to 30 years. It normally slopes upward because lenders want more return for locking money up longer.ExampleThe 2-year at 3.5%, the 10-year at 4.2%, and the 30-year at 4.7% make a normal, upward-sloping curve. The 10-year minus the 2-year, 70 bps, is the 2s10s spread traders quote.See also Inverted yield curve, Treasury securities, Federal funds rate

LBOs and private equity5

Dividend recapitalization (dividend recap)

A PE-owned company borrows new debt and pays the proceeds to its owners as a dividend. It returns cash early and lifts IRR, but leaves the company carrying more leverage.ExampleA company with $100m of EBITDA and $400m of debt borrows $200m more and pays it to its sponsor as a dividend. The sponsor gets cash back early and IRR rises; leverage goes from 4.0x to 6.0x.See also Internal rate of return, Leverage ratio, Leveraged buyout

Internal rate of return (IRR)

The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO

Leveraged buyout (LBO, buyout)

Buying a company with a large share of borrowed money, often around half the price, and using the company's own cash flow to pay the debt down. Returns come from EBITDA growth, debt paydown, and any multiple expansion.ExampleBuy a company with $100m of EBITDA at 10x, $1bn, with $500m of debt and $500m of equity. Exit in five years at 10x $150m of EBITDA, $1.5bn, with $300m of debt left: equity is $1.2bn, a 2.4x MOIC.See also Sources and uses, Internal rate of return, Sponsor, Paper LBO

Sources and uses

The table at the top of an LBO or merger model. Uses are what the money pays for (the equity purchase price, refinanced debt, fees); sources are where it comes from (new debt, sponsor equity, rollover). The two totals must match.ExampleUses: $800m to buy the equity, $200m to refinance debt, $30m of fees, $1,030m in total. Sources: $550m of new debt, $430m of sponsor equity, $50m of rollover, also $1,030m.See also Leveraged buyout, Rollover equity

M&A and deals4

Confidential information memorandum (CIM)

The detailed marketing book a sell-side banker writes about a company for sale, covering the business, its market, management, and financials. Buyers receive it after signing a nondisclosure agreement.ExampleOn the sale of a $300m packaging company, the analyst spends three weeks on a 60-page CIM: business overview, customer mix, five years of historical financials, and management's projections.See also Teaser, Sell-side process, Data room

Data room (virtual data room, VDR)

A secure online folder where a seller posts contracts, financials, and other documents for buyers to diligence. Access is tracked, and it usually opens in the later rounds of a sale.ExampleIn round two of a sale, the buyer's lawyers and accountants get logins to a data room with 2,000 documents: customer contracts, leases, tax returns, monthly financials. The seller sees who opened what.See also Due diligence, Sell-side process

Due diligence

The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent

Underwriting

A bank's role in a securities offering: it commits to buy or sell the shares or bonds, markets them to investors, and takes on risk in exchange for a fee called the underwriting spread.ExampleBanks agree to buy $1bn of bonds at 99.0 and sell them to investors at 100.0. The 1 point is a $10m spread; if demand is weak and they have to sell below 99.0, they take the loss.See also Initial public offering, Follow-on offering, High-yield bond

Valuation2

Enterprise value (EV, TEV)

The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow

EV/EBITDA multiple (EV/EBITDA)

Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis

Trading and products2

Duration (modified duration)

A bond's sensitivity to interest rates: the approximate percent price change for a one percentage point move in yield. A bond with a duration of 7 falls about 7% if yields rise 1%.ExampleA $20m bond position with a duration of 5 loses about $1m if yields rise 1%, and gains about $200,000 if they fall 20 bps.See also DV01, Convexity, Treasury securities

Interest rate swap

A contract to exchange fixed-rate interest payments for floating-rate ones on a notional amount. A company with a SOFR-based loan can pay fixed and receive floating on a swap to lock in its borrowing cost.ExampleA company with a $100m loan at SOFR + 2% enters a swap where it pays 3.8% fixed and receives SOFR. The SOFR legs cancel, so its all-in cost is locked at 5.8% whatever SOFR does.See also Secured Overnight Financing Rate, DV01, FICC