Core Concepts and Principles Flashcards

A borrower with total debt of $6 million and EBITDA of $1.5 million has what leverage multiple?

Answer: 4.0x

Debt/EBITDA = $6M / $1.5M = 4.0x.

Which factor most increases loss given default (LGD) on a secured loan?

Answer: Collateral that is specialized and difficult to resell

Specialized collateral has a thin resale market, lowering recoveries and raising LGD.

Why is a company's off-balance-sheet obligation, such as a guarantee of an affiliate's debt, important to a credit analyst?

Answer: It represents a contingent liability that could drain cash if triggered

Contingent liabilities can become actual obligations and impair repayment capacity.

What is the main credit risk of a large customer concentration, such as one client generating 45% of revenue?

Answer: Loss of that client could severely impair cash flow

Heavy dependence on one customer makes revenue and repayment vulnerable to that relationship.

A term loan is used to finance a piece of equipment with a 7-year useful life. What is the most appropriate loan maturity?

Answer: Matched to or shorter than the equipment's useful life

Matching maturity to the asset's useful life ensures the asset generates cash for repayment while still productive.

Which of the following best describes a 'global cash flow' analysis?

Answer: Combined cash flow of the business and its guarantors to assess total repayment capacity

Global cash flow combines business and owner/guarantor income and obligations to gauge overall debt capacity.

When a borrower's audited statements contain a 'going concern' qualification, what should the credit analyst conclude?

Answer: The auditor has substantial doubt about the entity's ability to continue operating

A going concern paragraph signals substantial doubt about survival over the next year, a major red flag.