CTA Credit Analysis & Debt Markets for Distressed Companies 2

Question 1

A 'lien' in the context of corporate restructuring gives a creditor:

Accepted Answer

A legal claim against specific collateral that can be enforced if the debtor defaults

Answer

A lien gives the secured creditor the right to seize and sell the specific collateral pledged as security for the debt, providing recovery protection that unsecured creditors lack.

Question 2

In analyzing a distressed company's debt structure, 'first lien' vs. 'second lien' refers to:

Accepted Answer

The priority of claims against collateral in the event of liquidation, with first lien having superior collateral rights

Answer

First lien lenders have first priority claim on collateral proceeds, recovering before second lien holders, which creates fundamentally different risk profiles and recovery expectations.

Question 3

A 'revolver' in corporate debt structures is best described as:

Accepted Answer

A revolving credit facility that allows the company to borrow, repay, and re-borrow up to a stated limit, typically providing liquidity management flexibility

Answer

Revolving credit facilities provide flexible liquidity, and their availability — or restriction — during distress is often a key indicator of a company's ability to manage through a crisis.

Question 4

What is 'negative pledge' covenant in a loan agreement?

Accepted Answer

A restriction preventing the borrower from granting additional liens on assets to other creditors without the lender's consent

Answer

A negative pledge covenant protects existing lenders from having their collateral priority diluted by new secured creditors claiming the same assets.

Question 5

In the context of distressed debt, 'recovery rate' refers to:

Accepted Answer

The percentage of face value that creditors actually receive through the restructuring or liquidation process

Answer

Recovery rates vary significantly by seniority and collateral quality, with senior secured creditors typically recovering 60-90%+ while unsecured creditors may receive pennies on the dollar.

CTA - Certified Turnaround Analyst Practice Test

CTA - Certified Turnaround Analyst Practice Test

CTA Credit Analysis & Debt Markets for Distressed Companies 2