Credit Analysis & Debt Markets for Distressed Companies Flashcards
6 cards from real CTA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit Analysis & Debt Markets for Distressed Companies flashcards as text
In US distressed debt markets, a bond trading at a 'yield to worst' (YTW) above 1,000 basis points over Treasuries is typically classified as:
Answer: Distressed, indicating the market prices in significant default or restructuring risk
Bonds trading at spreads exceeding 1,000 bps over Treasuries are generally considered distressed because the market is pricing a high probability of default or debt restructuring.
A 'covenant violation' in a loan agreement is significant in a turnaround because:
Answer: It allows lenders to declare a default, potentially accelerating all debt obligations and triggering a liquidity crisis
Covenant violations give lenders the contractual right to declare default and demand immediate repayment, which can cause a liquidity crisis even if the company is generating positive cash flow.
Which credit metric is most important for assessing near-term default risk in a distressed company?
Answer: Fixed charge coverage ratio
The fixed charge coverage ratio measures how many times earnings cover fixed obligations (interest, principal, leases), making it the most direct measure of whether the company can service its debt.
'Distressed debt investing' typically involves:
Answer: Purchasing the debt of financially troubled companies at a discount with the goal of profiting from recovery or plan confirmation
Distressed debt investors buy claims at deep discounts and profit if the company recovers or if the restructuring process delivers returns above the discounted purchase price.
What does 'loan to own' mean in a distressed investing context?
Answer: Purchasing distressed debt at a discount with the intent of converting it to equity ownership in the reorganized company
Loan-to-own investors acquire distressed debt strategically intending to receive equity in the reorganized business through a debt-for-equity conversion in the restructuring plan.
The 'fulcrum security' in a restructuring is:
Answer: The class of debt or securities at the level of the capital structure where enterprise value runs out, making it the pivotal class in negotiations
The fulcrum security class is the one that will be partially or fully converted to equity — holders of this class have the most negotiating power over the final ownership structure.