How to Size Debt in a Private Credit Interview

"How would you size the debt for this business?" is one of the most common technical questions in private credit interviews. It is also one of the most misunderstood.

Candidates from banking backgrounds tend to answer with a single number — "I would lend at 5x EBITDA" — as if debt sizing is a formula with one input. In private credit, debt sizing is a judgment call driven by at least three constraints, and the binding one depends on the business.

The Three-Constraint Framework

Every private credit lender sizes debt using three overlapping tests. The maximum debt the lender will approve is the lowest of the three:

Constraint 1: Leverage

This is the one everyone knows. Maximum debt = Target Leverage Multiple × EBITDA.

But which EBITDA? Not the sponsor's adjusted figure. The lender forms an independent view — "lender-adjusted EBITDA" — by reviewing each addback and removing items they consider aggressive or non-recurring. See Cash Flow Analysis for Private Credit for how lenders challenge EBITDA.

Typical leverage ranges for mid-market direct lending:

• Senior secured unitranche: 4.0x–5.5x for stable businesses, 3.0x–4.0x for cyclical or volatile credits
• First lien in a two-tranche structure: 3.5x–4.5x
• Total leverage (including mezzanine): 5.0x–6.5x

These are guidelines, not rules. A software business with 95% recurring revenue and 50% margins might support 6x. A cyclical manufacturer with thin margins might not support 3.5x. The leverage multiple is an output of the analysis, not an input.

Constraint 2: Cash Flow Coverage

Leverage tells you the stock of debt relative to earnings. Coverage tells you whether the cash flow can service the debt payments.

The lender calculates: Free Cash Flow ÷ Total Debt Service (interest + mandatory amortization)

Most private credit lenders want to see minimum 1.5x–2.0x debt service coverage in the base case. Some use interest coverage (EBITDA ÷ Interest) as a simpler proxy, typically requiring 2.0x or above.

Coverage is often the binding constraint, not leverage. Consider a business with $50M of EBITDA, strong margins, and steady growth. On leverage alone, it could support $250M of debt at 5.0x. But after maintenance capex ($8M), cash taxes ($7M), and working capital absorption ($5M), free cash flow is $30M. At SOFR + 575 (say 10% all-in), interest on $250M is $25M. Coverage is 1.2x — too thin.

The lender would either reduce the debt to bring coverage above 1.5x, or require structural features (lower amortization, PIK toggle) to manage the cash burden.

In an interview, always check coverage after stating a leverage figure. This shows the interviewer you are sizing debt based on actual cash flow, not just a multiple.

Constraint 3: Liquidity / Downside Resilience

The third test asks: does the borrower have enough liquidity to survive a downturn without defaulting?

The lender stress-tests the cash flow model: if EBITDA drops 20-25%, can the business still service its debt and maintain minimum cash balances? Is there sufficient revolver availability to absorb working capital swings?

This constraint often reduces the maximum debt below what leverage and coverage would suggest. A business might pass the 5x leverage test and the 1.5x coverage test in the base case. But in a downside where EBITDA drops 25%, leverage jumps to 6.7x, coverage falls to 0.9x, and the revolver is fully drawn. That business cannot support 5x.

The debt should be sized so that the business survives the downside, not just the base case. The lender's stress test typically assumes a 15-25% EBITDA decline (depending on cyclicality), plus adverse working capital and capex timing, and checks that coverage stays above 1.0x and liquidity stays positive.

How to Present Debt Sizing in an Interview

Here is a structured approach you can use when given a business and asked to size debt:

Step 1: Establish sustainable EBITDA. "The sponsor's adjusted EBITDA is $50M, but I would haircut the $3M of run-rate synergies and the $2M of 'one-time' restructuring costs that appear annually. My lender-adjusted EBITDA is $45M."

Step 2: Set leverage guardrails. "For a business with this profile — mid-market industrial services, moderate cyclicality, 65% cash conversion — I would target 4.0x–4.5x senior leverage."

Step 3: Check coverage. "At 4.5x, total debt would be approximately $200M. At 10% all-in cost, interest is $20M. After maintenance capex and taxes, free cash flow is approximately $28M. That gives me 1.4x debt service coverage, which is slightly below my 1.5x minimum. I would either reduce to 4.0x or negotiate a lower cash coupon with a PIK component to improve the cash coverage."

Step 4: Stress-test the downside. "In a downside case with a 20% EBITDA decline to $36M, leverage rises to 5.6x and coverage drops to approximately 1.0x. The revolver provides $15M of additional liquidity. The business survives but with no margin for error. This confirms that 4.0x–4.5x is the right range — higher leverage would not be supportable."

Step 5: State the recommendation. "I would size senior debt at 4.0x, or $180M, to maintain comfortable coverage in the base case and survivability in the downside. If the sponsor needs additional leverage, I would consider a mezzanine tranche rather than stretching the senior."

What Determines the Right Leverage Multiple?

The leverage target is not arbitrary. It depends on business characteristics that drive cash flow predictability and conversion:

Factors that support higher leverage:

• High proportion of recurring or contractual revenue
• Low cyclicality / non-discretionary demand
• High EBITDA margins (above 25-30%)
• Strong cash conversion (above 65%)
• Low maintenance capex requirements
• Diversified customer base
• Essential service or regulatory-driven demand

Factors that require lower leverage:

• Project-based or transactional revenue
• Cyclical end markets
• Thin margins (below 15%)
• High capital intensity
• Customer or supplier concentration
• Commodity exposure
• Working capital volatility

A software business with 90% recurring revenue and 45% margins might support 5.5x. An industrial distributor with 8% margins and cyclical exposure might max out at 3.5x. The business profile determines the leverage, not a market-wide rule of thumb.

Sizing Beyond the Senior: Total Capital Structure

Sometimes the interviewer asks you to think about the full capital structure, not just the senior tranche. In that case, you are sizing:

• Senior secured debt (your piece) — typically 3.5x–5.0x
• Mezzanine or second lien — additional 1.0x–1.5x
• Total debt — typically 5.0x–6.5x for mid-market
• Equity contribution — typically 40-50% of enterprise value

The lender sizes the senior based on where they want to sit in the capital structure relative to the enterprise value. If the business is worth 8x EBITDA and you lend at 4x, your loan-to-value is 50%. That means the enterprise would have to lose half its value before the senior debt is impaired.

Attachment point and detachment point — where your debt starts and ends in the capital structure — determine your recovery risk. Lending at 0-4x on an 8x EV business is very different from lending at 4-6x. Same business, very different risk.

What Weak Answers Sound Like

• "I would lend at 5x because that is market." — No analysis. No reference to the specific business. No coverage check.
• "I would look at leverage comps for similar deals." — Comps are a reference point, not a methodology. The debt should be sized based on the cash flow of this business.
• "The sponsor wants 6x so I would try to get there." — The lender does not size debt to meet the sponsor's request. The lender sizes debt based on what the cash flow can support.

The 60-Second Interview Answer

"I size debt based on three constraints. First, leverage — I set a target multiple based on the business profile: cash flow quality, cyclicality, margins, and capital intensity. Second, coverage — I check that free cash flow after maintenance capex and taxes covers debt service at least 1.5 to 2.0 times. Third, downside resilience — I stress-test the cash flow to make sure the business can survive a 20% EBITDA decline without defaulting. The binding constraint is whichever gives the lowest debt capacity. For a stable mid-market services business with strong conversion, that might be 4.0 to 4.5 times. For a cyclical manufacturer, it might be 3.0 to 3.5 times. The multiple is an output of the analysis, not an assumption."

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The Free Credit Investment Memo Framework includes the debt sizing section that lenders use in real investment memos. Download it to practice the three-constraint approach. For 80 interview questions with full model answers including debt sizing, see the Private Credit Interview Guide.