Credit Analysis Flashcards
7 cards from real Banking practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Analysis flashcards as text
A borrower's interest coverage ratio drops from 4.0x to 1.2x over two years. What is the most likely credit implication?
Answer: Significant deterioration in ability to service interest payments
A drop to 1.2x means earnings barely cover interest expense, leaving little cushion for unexpected downturns and indicating serious credit deterioration.
In asset-based lending (ABL), which assets typically form the borrowing base?
Answer: Eligible accounts receivable and inventory
ABL borrowing bases are secured by liquid assets like eligible receivables and inventory, which can be quickly liquidated if the borrower defaults.
What is 'covenant-lite' (cov-lite) lending?
Answer: Loans lacking traditional financial maintenance covenants
Cov-lite loans omit maintenance covenants that require borrowers to meet ongoing financial tests, reducing lender early warning signals and protection.
What does 'probability of default' (PD) measure in credit risk analysis?
Answer: The likelihood that a borrower will fail to meet debt obligations within a specified time horizon
PD quantifies the statistical likelihood of a borrower defaulting over a given period, typically one year, and is central to credit pricing and risk-weighted assets.
Which of the following would most likely trigger a material adverse change (MAC) clause in a loan agreement?
Answer: A major lawsuit threatening the borrower's solvency
A MAC clause allows lenders to withdraw or modify financing if a significant negative event materially impairs the borrower's financial condition or ability to repay.
How does 'subordinated debt' differ from 'senior secured debt' in a capital structure?
Answer: Subordinated debt ranks below senior secured debt in the repayment hierarchy
Subordinated debt is junior in the capital structure and is repaid after senior secured creditors in a default or bankruptcy, making it riskier and typically higher-yielding.
Which of the following is the best example of qualitative analysis in credit underwriting?
Answer: Assessing management team experience and industry reputation
Qualitative credit analysis evaluates non-numerical factors such as management quality, competitive positioning, and industry dynamics that affect repayment ability.