Banking Credit Analysis 4

Question 1

What does a high days-sales-outstanding (DSO) figure indicate about a borrower?

Accepted Answer

Slow collection of receivables, potential cash flow issue

Answer

High DSO means the company takes longer to collect payment from customers, which can strain cash flow and indicate credit risk.

Question 2

In leveraged lending, what is a 'term loan B' (TLB)?

Accepted Answer

A long-term senior secured loan with minimal amortization sold to institutional investors

Answer

Term Loan B is a senior secured credit facility with minimal scheduled amortization (often 1% per year), held predominantly by institutional investors like CLOs and hedge funds.

Question 3

Which of the following is an example of a negative pledge covenant?

Accepted Answer

Prohibiting the borrower from pledging assets to other creditors

Answer

A negative pledge covenant prevents the borrower from using assets as collateral for other debt, protecting the existing lender's security position.

Question 4

What is 'loss given default' (LGD) in credit risk modeling?

Accepted Answer

The proportion of exposure the lender loses if a default occurs

Answer

LGD represents the percentage of the exposure at default that the lender cannot recover, after accounting for collateral and recoveries.

Question 5

Which credit metric is most relevant when analyzing a startup company with no historical earnings?

Accepted Answer

Revenue run rate and projected cash burn rate

Answer

For startups, revenue run rate and cash burn rate are critical because they reveal how long the company can operate before needing additional funding.

Banking Practice Test

Banking Practice Test

Banking Credit Analysis 4