Banking Credit Analysis 5

Question 1

A borrower's interest coverage ratio drops from 4.0x to 1.2x over two years. What is the most likely credit implication?

Accepted Answer

Significant deterioration in ability to service interest payments

Answer

A drop to 1.2x means earnings barely cover interest expense, leaving little cushion for unexpected downturns and indicating serious credit deterioration.

Question 2

In asset-based lending (ABL), which assets typically form the borrowing base?

Accepted Answer

Eligible accounts receivable and inventory

Answer

ABL borrowing bases are secured by liquid assets like eligible receivables and inventory, which can be quickly liquidated if the borrower defaults.

Question 3

What is 'covenant-lite' (cov-lite) lending?

Accepted Answer

Loans lacking traditional financial maintenance covenants

Answer

Cov-lite loans omit maintenance covenants that require borrowers to meet ongoing financial tests, reducing lender early warning signals and protection.

Question 4

What does 'probability of default' (PD) measure in credit risk analysis?

Accepted Answer

The likelihood that a borrower will fail to meet debt obligations within a specified time horizon

Answer

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.

Question 5

Which of the following would most likely trigger a material adverse change (MAC) clause in a loan agreement?

Accepted Answer

A major lawsuit threatening the borrower's solvency

Answer

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.

Banking Practice Test

Banking Practice Test

Banking Credit Analysis 5