Limits On Senior Debt

This question tests your understanding of the tradeoff between debt cost, creditor protection, and capital structure in private equity deals. In leveraged buyouts, interviewers want to see that you know senior debt is cheaper because it sits highest in the repayment stack and is protected by security and covenants, but that lenders will only provide so much of it because leverage increases default risk as debt levels rise.

The key concept is that financing capacity is limited by what lenders are willing to underwrite, not just by the price of capital. Candidates should be able to explain why sponsors use a mix of senior and junior debt, how risk and repayment priority affect pricing, and why higher leverage typically requires progressively more expensive financing sources.