Commercial Lending Principles Flashcards

Which of the following best describes a 'mezzanine loan' in commercial lending?

Answer: A subordinated loan that sits between senior debt and equity, typically unsecured or secured by a pledge of ownership interests

Mezzanine debt is subordinated to senior debt but ranks above equity, often secured by a pledge of the borrower's ownership interests rather than real property, and carries higher interest rates reflecting its risk.

A lender is reviewing a borrower's 'global cash flow.' What does this analysis typically include?

Answer: Combined cash flows of all related entities and guarantors, providing a complete picture of repayment capacity

Global cash flow analysis aggregates the income, expenses, debt obligations, and cash flows of all related entities and guarantors to assess the total repayment capacity available.

What is the primary risk that an 'interest rate swap' helps a commercial borrower mitigate?

Answer: Exposure to rising interest rates on floating-rate debt by exchanging for fixed payments

An interest rate swap allows a borrower with floating-rate debt to exchange those variable payments for fixed payments, protecting against rate increases.

Under the Community Reinvestment Act (CRA), what are banks required to demonstrate?

Answer: That they meet the credit needs of the communities they serve, including low- and moderate-income neighborhoods

The CRA requires banks to actively lend, invest, and provide services in low- and moderate-income communities within their assessment areas, with performance evaluated by regulators.

A commercial lender calculates a borrower's 'leverage ratio' as total debt divided by EBITDA. If debt is $4M and EBITDA is $1M, what is the leverage ratio and how is it generally interpreted?

Answer: 4.0x, indicating the borrower carries a significant debt load relative to earnings

A leverage ratio of 4.0x means the borrower owes four times its annual EBITDA in debt, which many lenders view as elevated and indicating meaningful credit risk.

Which of the following is an example of a 'negative covenant' in a commercial loan agreement?

Answer: Borrower may not incur additional debt above a specified threshold without lender consent

Negative covenants restrict borrower actions, such as prohibiting the incurrence of additional debt beyond a threshold, protecting the lender from increased credit risk.

In the context of commercial lending, what is 'loan syndication'?

Answer: The distribution of a large loan among multiple lenders to spread risk, with one bank acting as lead agent

Loan syndication involves a lead bank arranging and managing a loan facility that is funded by a group of lenders, allowing each participant to share the credit risk and exposure.