Credit Analysis and Lending Flashcards

In a leveraged buyout (LBO) loan analysis, the primary repayment source is typically:

Answer: Target company's operating cash flows

LBO loans are repaid through the acquired company's future operating cash flows, making DSCR and EBITDA projections critical to underwriting.

What does 'amortization' mean in the context of a commercial loan?

Answer: Gradual repayment of principal over the loan term

Amortization refers to scheduled, systematic repayment of loan principal over the loan's life through periodic payments.

A 'guaranty' in lending differs from collateral because it:

Answer: Represents a promise by a third party to repay if the borrower defaults

A guaranty is a personal or corporate promise by a third party (guarantor) to fulfill the borrower's obligation upon default.

Which credit analysis technique projects a company's future financial position under adverse scenarios?

Answer: Stress testing

Stress testing evaluates a borrower's ability to service debt under negative economic conditions, such as revenue decline or interest rate increases.

Under the 5 Cs of credit, 'Capital' refers to:

Answer: The borrower's net worth and financial reserves

Capital represents the borrower's own financial investment or net worth, showing skin-in-the-game and ability to absorb losses.

An interest reserve in a construction loan is used to:

Answer: Fund interest payments while the project generates no income

An interest reserve is built into the loan to cover interest charges during the construction phase before the project produces revenue.

Which of the following best describes 'recourse' lending?

Answer: The lender can pursue both collateral and the borrower's personal assets upon default

In recourse lending, the lender can pursue the borrower's personal or business assets beyond the pledged collateral if the collateral proceeds are insufficient.