Walk me through a debt schedule from free cash flow to ending debt balances. Name each step in order.

1. I start with the free cash flow the business generated that year, which is EBITDA minus cash interest, cash taxes, capex, and the change in working capital.
2. I use that free cash flow first to pay any mandatory amortization on the term loans, typically 1% a year on a TLB.
3. Whatever cash remains above the minimum operating cash balance is the excess cash flow sweep, and I apply it to prepayable debt in strict order of seniority: revolver first, then term loans.
4. High-yield bonds are not prepayable because of call protection, so the sweep skips them entirely, and any cash beyond the term loans just builds on the balance sheet.
5. If free cash flow was negative, I do the reverse and draw on the revolver to cover the shortfall and keep the minimum cash balance intact.
6. I roll each debt tranche forward: beginning balance minus mandatory amortization minus any sweep prepayment, then plus any PIK interest that accrued to principal.
7. The new ending balances feed back into the interest calculation for the next year, which creates a circular reference I handle either by using beginning balances or by enabling iterative calculations for average balances.
8. Those exit-year ending balances flow straight into returns as net debt, so every dollar swept during the hold transfers directly to exit equity.

What interviewers are really testing

The debt schedule is where interviewers separate candidates who have built an LBO from those who have only read about one. Three signals matter.

1. Order of operations, stated crisply. The single most common prompt is "walk me through the debt schedule" or "how does a cash sweep work?" A strong answer moves in sequence without hesitation: FCF available for debt service → mandatory amortization → sweep of excess cash to prepayable tranches in order of seniority → roll balances forward → recompute interest. Candidates who jumble the order (e.g., sweeping before mandatory amort, or sweeping bonds) reveal they've never traced the cash.

2. The circularity question. "Why does an LBO model have a circular reference, and how do you fix it?" is a near-guaranteed follow-up at Evercore/PJT-style technicals. You must articulate the loop (interest depends on debt balance, balance depends on paydown, paydown depends on FCF, FCF depends on interest) and give at least two fixes (beginning-balance interest; average balance with iteration or a breaker switch) with the accuracy trade-off.

3. Instrument-level fluency. Interviewers listen for whether you know that TLBs amortize at 1% with a bullet, that bonds are non-call and therefore excluded from the sweep, that the revolver is drawn when FCF is negative and repaid first when it's positive, and that PIK accrues to principal rather than consuming cash. Dropping one of these naturally ("the sweep skips the notes because of call protection") signals real fluency.

The elite differentiator is connecting mechanics to returns: unprompted, note that faster sweeps mean lower exit net debt, which is a dollar-for-dollar transfer to exit equity, and that this is precisely the deleveraging driver of LBO returns. Interviewers also love the "what if FCF is negative?" curveball; the word they want to hear is revolver.

Common traps

Trap 1: Sweeping the high-yield bonds. Candidates apply excess cash pro-rata across all tranches, including notes. Bonds carry call protection (e.g., non-call 3, then declining call premiums): sweeping them ignores the indenture and overstates deleveraging of the wrong tranche.

Say it out loud: "The sweep only touches prepayable debt: revolver first, then the term loans. The bonds are non-call, so they stay outstanding until maturity or a call date; excess cash beyond the term loans just builds on the balance sheet and reduces net debt at exit."

Trap 2: Forgetting mandatory amortization comes before the sweep. Some candidates apply 100% of FCF as a sweep and never mention scheduled amortization, understating required payments in a tight-liquidity year.

Say it out loud: "First I pay mandatory amortization (say 1% a year on the TLB) and only the cash left after that, above the minimum cash balance, gets swept as an optional prepayment."

Trap 3: Computing interest on the beginning balance and calling it 'exact.' Beginning-balance interest is a simplification that avoids circularity; it slightly overstates interest when debt is being paid down. Presenting it as the precise method invites a push.

Say it out loud: "I'd use the average of beginning and ending balances for accuracy, which creates a circular reference I'd handle with iterative calc or a circularity breaker; or I'd use beginning balances as a conservative simplification, since it slightly overstates interest in a deleveraging model."

Trap 4: Treating PIK interest as a cash cost. Deducting PIK from FCF double-penalizes the company: PIK doesn't consume cash. It compounds into principal.

Say it out loud: "PIK interest accrues to the debt balance rather than reducing cash flow, so it helps near-term liquidity but grows the exit balance, which comes straight out of exit equity."

Trap 5: Letting cash go negative instead of drawing the revolver. In a year of negative FCF, weak models show negative cash. The revolver exists exactly for this.

Say it out loud: "If free cash flow is negative, the company draws on the revolver to cover the shortfall and hold its minimum cash balance, and that draw is repaid first in the next positive year, before any term loan sweep."

Trap 6: Ignoring the minimum cash balance. Sweeping every dollar to zero cash is operationally impossible: the business needs working cash.

Say it out loud: "The sweep applies only to cash above a minimum operating balance (say 2% of revenue) because the company needs cash on hand to run day to day."