Direct Lending Interview Questions, from Origination to Workout

"The sponsor wants 5.5x, a springing covenant and room for add-ons. What do you take to the investment committee?" A direct lending fund holds what it lends, so its interviews ask for a view that runs from the first term sheet to the last workout call: what the fund will own, what it can enforce and how early it finds out. The questions below follow that order and use dated public data from regulators, rating agencies, law firms and valuation advisers. The arithmetic of leverage, coverage and cash flow is in private credit technical interview questions.

Origination: the sponsor changes who stands behind the loan, not the need to underwrite it

1. What does a direct lender underwrite that a bank arranger does not?

The loan as a permanent asset. Private credit lenders originate and hold loans directly, often bilaterally or in a small group [1], and typically hold them to maturity or refinancing [2]. Secondary trading rose in 2026 with most trades above 95% of par [3], which Lincoln reads as liquidity management, not credit concern. The work is the documents, the monitoring and the workout, not distribution.

Tests: Whether you see holding the risk as the difference.

Common mistake: Describing direct lending as lending without a bank when the real difference is holding the risk.

2. What does the typical direct lending borrower look like?

Smaller, more levered and thinner on coverage, for 100 bps more. At the 5.0x median, 100 bps of spread costs the borrower 5% of EBITDA a year.

2025 issuance	Private credit	Leveraged loans
Median revenue	$223mm	$902mm
Median debt / EBITDA	5.0x	3.2x
Average EBITDA / cash interest	2.2x	3.7x
Median spread over SOFR	500 bps	400 bps
Median loan	$20mm	$275mm
Median maturity	5 years	5 years

Source: Federal Reserve staff, August 2026 [1].

Tests: Whether you describe the borrower in numbers, not adjectives.

Common mistake: Using leveraged loan comparables for a private credit borrower.

3. What does a sponsor add to a credit, and what do you underwrite when there is none?

Fresh equity and a reputation at stake. The Financial Stability Board finds that loans to sponsor-backed companies are less likely to progress from delinquency to outright default, which it says may reflect sponsors providing liquidity in stress [4]. Without a sponsor the lender underwrites the owner, has no equity cure source and compensates with lower leverage, tighter covenants or a wider spread.

Tests: Whether you treat sponsor support as a credit factor with limits.

Common mistake: Assuming the sponsor will always cure. Its support is an option, not an obligation.

4. What does the borrower pay for the certainty of a direct loan?

A premium that is narrow by recent history. The median private credit spread on 2025 issuance was 500 bps over SOFR against 400 bps for leveraged loans [1]. PitchBook LCD measured the gap between broadly syndicated and direct lending buyout loans at 146 bps year to date through July 2026, the narrowest since 2019, though it widened to 166 bps over the latest three months [5]. The two measures use different samples. On a $250mm loan, 146 bps is $3.65mm a year, 7.3% of EBITDA at 5.0x leverage.

Tests: Whether you can say what the premium buys: speed, customized terms and flexibility in renegotiation [1].

Common mistake: Calling the spread the return without netting expected loss and fees.

Structure: the hold, the split and the add-on shape the exposure

5. Who controls enforcement in a first-out / last-out unitranche?

The agreement among lenders decides, and the borrower is not a party to it. Typically first-out lenders direct enforcement after specified triggers, and last-out lenders hold a right to buy the first-out position at par plus accrued interest and fees, while changes to price or priority need affected lenders' consent. Terms vary, so read it. If first-out is $120mm and the collateral is worth $192mm, buying it at par spends about $120mm of cash for $120mm of value: it buys control, not value.

Tests: Whether you know which piece you hold and who steers.

Common mistake: Treating the buy-out right as a bargain when it is a price for control.

6. Why do lenders club or split a loan?

Because one fund's concentration limit caps its hold. A fund limited to $80mm per borrower needs five lenders for a $400mm unitranche. Federal Reserve staff report that the average number of private debt lenders per facility has risen over time, consistent with club deals to share risk and fund larger borrowers [2].

Tests: Whether you understand the constraints behind the final hold.

Common mistake: Quoting the hold you would like instead of the hold the fund's limits and the agreement allow.

7. How do you underwrite a delayed draw term loan for add-on acquisitions?

As a commitment to a different company. Each draw should pass a pro forma leverage test, with a cap and a ticking fee while undrawn. With $250mm funded on $50mm of EBITDA (5.0x), a $50mm draw to buy $7mm of EBITDA at 7.1x takes pro forma leverage to $300mm / $57mm, or 5.3x.

Tests: Whether you count unfunded commitments as exposure.

Common mistake: Underwriting the closing company and ignoring the one the draws create.

8. Does the entry multiple matter if leverage is the same?

Yes, because it sets the cushion. A 5.5x loan on a company bought at 14.0x starts at 39% loan-to-value; with flat EBITDA and a market multiple of 10.0x it is at 55%. New buyouts averaged 12.0x in H1 2026 against 12.8x a year earlier [3], and 70.0% of the $22.3bn of principal lenders took over in H1 2026 came from 2021 and 2022 buyouts, many struck at higher multiples and leverage [3].

Tests: Whether you underwrite the cushion, not only the ratio.

Common mistake: Comparing leverage across vintages without comparing the value below it.

Documentation: borrower size shapes the covenant package, definitions decide what it means

9. Which borrowers get a maintenance covenant?

Nearly all smaller borrowers and about half of larger ones. Proskauer's review of its 2025 U.S. deals found 21% were covenant-lite, and 91% of those had EBITDA above $50mm [6]. If both shares describe the same deals, the 39% of loans made to companies with at least $50mm of EBITDA [6] implies that about half of larger borrowers got covenant-lite terms and about 3% of smaller ones.

Tests: Whether you tie covenant protection to the borrower's bargaining power.

Common mistake: Saying private credit always has maintenance covenants.

10. What do add-backs do to the leverage you report?

They flatter it. Lincoln found add-backs were 23.2% of adjusted EBITDA across its index companies in Q2 2026 [3], so 5.0x on adjusted EBITDA is 6.5x without them. The Financial Stability Board relays a UBS estimate, from November 2025, that true leverage in private credit may be closer to 7.0x [4]. Cap add-backs, limit the period for projected savings and ask how much has been realized.

Tests: Whether you convert a reported ratio into a proven one.

Common mistake: Taking the sponsor's multiple as the market's.

11. A borrower raises $100mm of super-priority debt ahead of a $250mm first lien, and the proceeds leave the group. The company is worth $300mm. What does the first lien recover?

80 cents: $200mm of $300mm reaches a $250mm claim that was covered 1.2x before. Liability management exercises move value or priority without a breach: drop-downs shift assets to unrestricted subsidiaries, and uptiers let a majority prime the minority. Protection comes from blockers on asset transfers and unrestricted subsidiary designations, and from sacred rights, drafted to cover non-pro rata exchanges, that require each affected lender's consent to change lien or payment priority.

Tests: Whether you know priority can change without a default.

Common mistake: Reading only the financial covenants.

12. You receive a 200-page credit agreement. What do you read first?

The definitions of EBITDA, indebtedness and permitted liens, because they feed every other test. Then the negative covenants on debt, liens, restricted payments, investments and asset sales; the amendment and voting provisions; and the events of default and cure rights. Finally, compare it with the sponsor's last deal to see what moved.

Tests: Whether you prioritize the clauses that move value.

Common mistake: Reading in page order and arriving at the baskets with no time left.

Monitoring: the loan is marked quarterly and the warning arrives earlier

13. What does the fund collect after closing, and what puts a loan on the watch list?

Monthly financials, a quarterly compliance certificate, a budget and regular management calls. Triggers are falling covenant headroom, revolver usage above plan, a missed budget, a PIK or amendment request and a sponsor stepping back. PitchBook counted 538 BDC-held borrowers showing credit pressure in March 2026, up 15% from 467 in December 2025 [5]. KBRA recorded a record share of the companies it reviewed in Q1 2026 downgraded two or more levels into its default-monitor range, as liquidity eroded and sponsors withdrew support [7].

Tests: Whether monitoring is a process with triggers.

Common mistake: Waiting for a covenant breach before asking questions.

14. How is a performing loan valued each quarter?

Mostly by discounted cash flow or yield analysis, calibrated at origination and updated quarterly for credit quality and market conditions [4]. About 2.5 points come off the price for 100 bps of wider spread on a three-year expected life. Lincoln's Q2 2026 marks on software loans show the credit effect: 99.0% of par below 35% loan-to-value, 97.8% from 35% to 50% and 87.1% above 50% [3].

Tests: Whether you know marks move with credit and spreads.

Common mistake: Saying private loans are carried at cost.

15. What happens to a fund's income when a loan goes on non-accrual?

The fund stops recognizing interest it does not expect to collect. A $50mm loan at 10% contributes $5mm a year; in a $2bn portfolio yielding 10%, moving it to non-accrual cuts gross investment income by 2.5%, and net income by more because fund expenses do not fall, before any markdown of principal.

Tests: Whether you connect one credit to fund-level income.

Common mistake: Equating non-accrual with a write-off.

Workout: the lender's options narrow as the sponsor's equity value falls

16. A borrower breaches its leverage covenant. Do you waive, amend or enforce?

Amend, on terms, unless the sponsor will not support the business. Ask for equity applied to debt, a reset covenant with less headroom, a fee and margin step-up, tighter baskets and milestones. On a $100mm hold, a 50 bps fee and a 50 bps step-up are worth $0.5mm up front and $0.5mm a year, which compensates for time and not for a worse credit.

Tests: Whether you use the breach as leverage for a negotiated outcome.

Common mistake: Waiving for a fee without changing what caused the breach.

17. What do you require to agree to a PIK amendment?

Sponsor equity at least equal to the interest deferred, a PIK margin above the cash rate, an amendment fee, a cap on the PIK period, a cash sweep when liquidity recovers and tighter covenants. Deferring 4% for two years on $100mm adds $8.2mm of principal and takes leverage from 5.0x to 5.4x on flat EBITDA of $20mm. Lincoln found bad PIK, meaning PIK that began after closing, in 55.4% of PIK loans in Q2 2026 [3].

Tests: Whether you treat PIK as a concession to be priced and conditioned.

Common mistake: Reading the amendment as a pricing opportunity rather than a credit decision.

18. When does the lender take the keys?

When the equity is out of the money, the sponsor will not fund and value is falling faster than waiting can repair it. Lincoln recorded lenders taking over $22.3bn of pre-takeover principal in H1 2026, against $24.2bn in all of 2025 [3]. The decision compares the recovery from control, after the cost and time of running the company, with the amended path.

Tests: Whether you can value the lender's alternatives.

Common mistake: Treating a takeover as failure instead of a recovery strategy.

19. A watch-list loan has a 30% chance of default. What is its expected loss?

Probability times severity. At a 50% recovery, 30% × (1 - 50%) is 15 points of principal, so the loan is worth about 85 before the interest it earns while it performs. If recovery follows the value a February 2024 Federal Reserve note reports for direct loans 30 days after default, around 33% [2], the same 30% chance costs about 20 points. Both inputs move the answer, so state both.

Tests: Whether you think in loss, which is default times severity.

Common mistake: Quoting a default probability without a recovery rate.

Market: every statistic depends on its definition

20. Defaults are 2.5%. Is private credit healthy?

It depends on what the number counts.

Measure	Reading	What it counts
Proskauer U.S. Private Credit Default Index, Q2 2026	2.51%	716 U.S. senior-secured and unitranche loans
Lincoln covenant default rate, Q2 2026	2.7%	Size-weighted; six-year average 3.9%
Lincoln bad PIK, Q2 2026	6.2% of loans	PIK that began after closing; Lincoln says it may also be viewed as a shadow default rate
FSB report (May 2026), outright defaults	About 1%	One study, trailing 12 months through 2025, excluding selective defaults
FSB report (May 2026), with selective defaults	Around 5%	Adds restructurings on non-arm's-length terms

Sources: Proskauer [8], Lincoln [3], Financial Stability Board [4].

Defaults describe frequency. Add severity before you call the asset class healthy.

Tests: Whether you ask what a rate counts before you quote it.

Common mistake: Using one default rate as the health of the asset class.

21. How big is the market, and who funds it?

Federal Reserve staff put U.S. private credit at about $1.4tn at the end of 2025, roughly the size of the leveraged loan market, with private debt funds and BDCs providing about 90% as of Q3 2025 [1]. The FSB's global estimate was $1.5tn to $2tn at the end of 2024, of which about $1tn in the United States [4]. Funding matters as much as size: in early 2026 managers used structural limits to manage large redemption requests in funds with redemption features [4].

Tests: Whether you separate size from the stability of funding.

Common mistake: Quoting a market size without its definition.

22. How do you underwrite a software borrower?

On the equity cushion and the durability of revenue. Software was about 21% of private credit issuance since 2020 [1], Lincoln's Q2 2026 marks ran from 99.0% of par below 35% loan-to-value to 87.1% above 50% [3], and PitchBook's July 2026 monitor calls software the most stressed cohort among BDC-held borrowers [5]. A loan at 40% loan-to-value reaches 53% after a 25% fall in value (40 / 0.75).

Tests: Whether you price disruption risk through value, not narrative.

Common mistake: Treating software as one risk when marks differ by loan-to-value.

How to use these questions

Answer each in the order a lender would: the decision, the two or three facts that drive it, then the protection or the next step. For the structure of the process, see the forty-question list. If your next step is a case, the Interview Guide pack includes three case studies and 80 questions with model answers.

For the topics in more depth, see sponsor-backed lending, documentation risk, direct lending versus syndicated lending and recovery analysis.

Sources and Method

All market figures are reported as of the date shown in the source and were last verified on 2026-10-09. Worked examples are illustrative.

[1] Ayelen Banegas, Sophia Castelo, Ahmet Degerli, Christine Dobridge, and Will Kennedy, "Private Credit and Leveraged Loan Markets: Similarities, Differences, and Substitution", FEDS Notes, Board of Governors of the Federal Reserve System, 11 August 2026. https://www.federalreserve.gov/econres/notes/feds-notes/private-credit-and-leveraged-loan-markets-similarities-differences-and-substitution-20260811.html [2] Fang Cai and Sharjil Haque, "Private Credit: Characteristics and Risks", FEDS Notes, Board of Governors of the Federal Reserve System, 23 February 2024. https://www.federalreserve.gov/econres/notes/feds-notes/private-credit-characteristics-and-risks-20240223.html [3] Lincoln International, "The Lincoln Private Market Index: Earnings Growth Drove a Q2 Rebound, While Private Markets Became More Selective", press release, 12 August 2026. https://www.lincolninternational.com/news/the-lincoln-private-market-index-earnings-growth-drove-a-q2-rebound-while-private-markets-became-more-selective/ [4] Financial Stability Board, "Report on Vulnerabilities in Private Credit", 6 May 2026. https://www.fsb.org/uploads/P060526.pdf [5] PitchBook LCD, "US Private Credit Monitor", July 2026 edition (data as of 31 July 2026). https://pitchbook.brightspotcdn.com/ed/67/604bbdc24d58b5dbee280e043942/july-2026-us-private-credit-monitor.pdf [6] Proskauer Rose LLP, "Proskauer Releases 15th Annual Private Credit Insights Report", press release, 9 February 2026. https://www.proskauer.com/insights/get-pdf/29617 [7] KBRA, "Private Credit: Q1 2026 Middle Market Compendium: Stability Despite March Madness", press release, 30 April 2026. https://www.kbra.com/publications/wdhymSND/kbra-releases-research-private-credit-q1-2026-middle-market-compendium-stability-despite-march-madness [8] Proskauer Rose LLP, "Proskauer’s Private Credit Default Index Reveals Rate of 2.51% for Q2 2026", press release, 28 July 2026. https://www.proskauer.com/report/proskauers-private-credit-default-index-reveals-rate-of-251-for-q2-2026