Credit Analysis & Risk Assessment Flashcards
7 cards from real CCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Analysis & Risk Assessment flashcards as text
A lender is evaluating a leveraged buyout (LBO) transaction. Which ratio is MOST important for assessing the sustainability of the debt load post-acquisition?
Answer: Total Debt / EBITDA, measuring years required to repay debt from operating earnings
In LBO credit analysis, Debt/EBITDA is the central metric because it shows whether the combined entity's operating earnings can sustainably service the newly added acquisition debt.
What does a 'waterfall' structure in a syndicated credit facility determine?
Answer: The priority order in which different tranches of lenders receive principal and interest payments or recoveries
A payment waterfall defines the sequence of distributions — senior secured lenders are paid first, followed by junior lenders, mezzanine, and equity in descending priority.
When assessing trade finance risk, what is the primary risk mitigated by a Letter of Credit (LC)?
Answer: Counterparty (buyer) default risk by substituting the bank's creditworthiness for the buyer's
An LC transfers the payment obligation from the buyer to the issuing bank, so the seller faces the bank's credit risk rather than the buyer's, significantly reducing counterparty default risk.
A credit analyst notices that a borrower's revenue has grown 40% while operating cash flow has grown only 5% in the same period. What should the analyst investigate first?
Answer: Working capital consumption — specifically whether receivables or inventory are absorbing the revenue growth
A large gap between revenue growth and cash flow growth typically points to working capital inflation — fast-growing receivables or inventory that consumes cash and may signal collection or inventory risk.
What is the significance of the 'net debt' figure in credit analysis, and how is it calculated?
Answer: Net debt = total interest-bearing debt minus cash and cash equivalents, representing the true debt burden if cash were used to repay obligations
Net debt subtracts readily available cash from gross debt, giving a more accurate picture of the borrower's true indebtedness since cash on hand could theoretically reduce the debt immediately.
Which scenario BEST represents 'event risk' in a credit risk context?
Answer: A highly rated borrower undergoes a hostile leveraged buyout that dramatically increases its debt load overnight
Event risk refers to sudden, unpredictable events (like an LBO, merger, or regulatory action) that can abruptly transform a creditworthy borrower into a highly leveraged or distressed entity.
In the context of the '5 Cs of Credit,' which 'C' is MOST directly assessed by analyzing a borrower's Balance Sheet debt-to-equity ratio?
Answer: Capital — the borrower's financial strength and equity cushion available to absorb losses
The 'Capital' pillar of the 5 Cs examines the borrower's net worth and equity base, with leverage ratios like debt-to-equity directly measuring the cushion available to absorb losses.