CTA Credit Analysis & Debt Markets for Distressed Companies

Question 1

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:

Accepted Answer

Distressed, indicating the market prices in significant default or restructuring risk

Answer

Investment grade

Answer

Speculative grade but stable

Answer

A risk-free instrument

Question 2

A 'covenant violation' in a loan agreement is significant in a turnaround because:

Accepted Answer

It allows lenders to declare a default, potentially accelerating all debt obligations and triggering a liquidity crisis

Answer

It automatically converts debt to equity

Answer

It requires the company to hire a CRO immediately

Answer

It results in automatic bankruptcy filing

Question 3

Which credit metric is most important for assessing near-term default risk in a distressed company?

Accepted Answer

Fixed charge coverage ratio

Answer

Debt-to-equity ratio

Answer

Days sales outstanding (DSO)

Answer

Return on invested capital (ROIC)

Question 4

'Distressed debt investing' typically involves:

Accepted Answer

Purchasing the debt of financially troubled companies at a discount with the goal of profiting from recovery or plan confirmation

Answer

Buying investment-grade bonds at a premium

Answer

Investing in stable dividend-paying stocks

Answer

Providing DIP financing exclusively through equity contributions

Question 5

What does 'loan to own' mean in a distressed investing context?

Accepted Answer

Purchasing distressed debt at a discount with the intent of converting it to equity ownership in the reorganized company

Answer

A strategy of converting all loans to lease arrangements

Answer

A standard mortgage lending strategy

Answer

A technique for hiding debt off the balance sheet

Question 6

The 'fulcrum security' in a restructuring is:

Accepted 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

Answer

The most senior secured claim in the capital structure

Answer

The DIP lender's claim

Answer

The class with the largest number of individual holders