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

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.

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

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.

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

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.

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

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.

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

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.

CTA - Certified Turnaround Analyst Practice Test

CTA - Certified Turnaround Analyst Practice Test

CTA Credit Analysis & Debt Markets for Distressed Companies