Credit Technicals

These covenants relate to financial metrics that a company must maintain after it raises debt. These are also the most common on bank debt issuances like revolvers or term loans.

Maintenance Covenant

“A company must keep a Debt/EBITDA ratio of 5x and a EBITDA/Interest ratio of 2x to avoid extra fees” What type of covenant is this an example of?

Maintenance Covenant

This type of covenant relates to a company having to take mandatory actions to avoid penalties. This is common on high yield bonds

Incurrence Covenant

“A company must use 50% of its proceeds from asset sales” This is an example of what type of covenant

Incurrence Covenant

What is the similarity between a revolver and term loan?

Both are senior secured debt with floating interest rates and maintenence

What is the difference between revolver and term loans?

Revolvers allow for a company to draw funds, pay them back, and draw again, while term loans are a fixed amount drawn with a fixed payment schedule that doesn’t act like an “overdraft” account

This is a loan from a bank for a specific amount of time with a fixed payment schedule that has either a fixed or floating interest rate

Term Loan

These are loans from a financial institution that give the borrower flexibility to draw funds, pay them, draw more, and pay them again. Acts like a credit card

Revolver Loan

This is a type of loan where a group of banks provide funds to a borrower.

Syndicated Loan

This is a type of loan where a business puts up their assets as collateral

Asset Based Loan

This is a type of short term financing where a company gets money for an operation until they can get a longer-term financing solution later

Bridge Loan

This is when a company uses a higher than normal amount of debt to finance an acquisition and they then use the cash flows over time to pay off the debt over time and then selling the company and earning profits as the sole equity holders

Leveraged Buyout

Your Debt to Equity and Debt to Assets ratios are what kind?

Solvency Ratios

These ratios tell us the ability of a company to survive over a long period of time

Solvency Ratios

This ratio tells us the ability for shareholder equity to cover all of our debts in the chance of a business downturn

Debt to Equity Ratio

This ratio is an indicator of financial leverage and also tells us the percentage of company assets that were financed by debt

Debt to Assets Ratio

These ratios tell us a company’s ability to cover its obligations and meet unexpected expenses with cash or assets

Liquidity Ratios

This ratio measures a company’s ability to use cash or quick assets to cover its liabilities and expenses ((CA-Inventory)/CL)

Quick Ratio

This ratio measure’s a company’s abiility to use its resources to meet its short term obligations (CA/CL)

Current Ratio

What equals your current assets minus your current liabilities

Working Capital

This ratio tells us a company’s ability to pay off its interest expense based on their current earnings (EBIT/Interest Expense)

Interest Coverage Ratio

What happens if you increase the time on accounts payable and decrease the time on your receivables

Your available cash increases

What are the 5 C’s of creditworthiness?

Character, Capacity, Capital, Collateral, Conditions

This C represents a firm’s track record of paying off debt

Character

This C represents if a firm should even take on more debt because they need to be able to cover their interest (Interest coverage ratio) and have a somewhat low debt/EBITDA ratio to ensure they aren’t taking on too much

Capacity

This C represents the other assets you have to pay for your loan

Capital

This C represents what the firm can take if you don’t repay your loan

Collateral

This C represents what you want to use the loan for

Conditions

Step 1 of a DCF

Project out future cash flows for the first 5-10 years

What is the formula for free cash flow

EBIT * (1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditures

Step 2 of the Discounted Cash Flow

Discount Free Cash flow back to the present because of time value of money

Step 3 of the Discounted Cash Flow

Find Terminal Value

Step 4 of the DCF

Discount terminal value

Step 5 of the DCF

Add all of the FCF and terminal value numbers together to get enterprise value

Step 6 of the DCF

Add back cash, subtract debt, and divide by outstanding shares to get implied share price

Comparable company analysis, precedent transactions, and discounted cash flows are forms of what?

Valuation

What is at the bottom of the capital stack, considered the cheapest form of financing, with a low risk and a low return?

Senior Debt

What is in the middle of the capital stack, which has equity properties but is debt, and has an average risk with an average return?

Mezzanine Debt

What is in the middle of the capital stack, which is riskier and has a higher return

Preferred Equity

What is at the top of the capital stack, which is the riskiest with highest returns

Common Equity

Interest on loans, interest on investments, commission income, credit cards, and forex operations are examples of what?

Revenue sources for banks

Interest expense, SG&A, Wages, and PP&E are examples of what?

Expenses for banks

If there are high interest rates, is it better to get a loan on debt or equity?

Equity

You should request all the financial statements, articles of incorporation, and certificate of existence to verify whether the corporate client’s request if legitimate and to understand the relationship and the company that you are helping more. Then you should perform a risk assessment using the company’s balance sheet and their annual report. You should also evaluate a company’s financial health, creditworthiness, and liquidity. Then you should talk with your manager and prepare a report to see whether we should approve or deny the request

How do you evaluate a corporate client if they are asking for a loan?

Research their financial situation, their objectives, their risk tolerance, and their known investment preferences. Then you should check their liquidity levels, business strategy, and if they need new technology, then meet the client in person to give guidance

How to offer investment services to a corporate client?

This covenant tells a borrower that they have to do something or continue doing whatever they’ve been doing

Positive Covenant

This restricts a borrower from doing something

Negative covenant

This is a term of a loan that a company cannot break

Financial covenant

What is LIBOR? This is the rate that international banks charge each other for borrowing

London Interbank Offering Rate

What is HIBOR

Hong Kong Interbank Offering Rate

What is CDOR

Canadian Dollar Offering Rate

This states that when a company gets acquired or a new entity controls the firm a bank can call the loans

change in control clause

Failure to pay interest rates after grace period in excess of the company’s debt cushion, failure to pay principal, and breach of covenants would result in what?

Default

This metric uses EBITDA to figure out how much debt a company can take on for leverage and coverage covenants (the lesser of the 2 between leverage and coverage is the constraint)

Debt Capacity

This is calculated by subtracting how much debt you have right now from the debt capacity

Debt cushion

This is calculated by dividing your cash flow towards the interest and principal amount of your debt over the entire cost of actually paying back your debt and is commonly used in power project and real estate finance

Debt service coverage ratio

This is when cash that isn’t used for debt payments have to be used to pay down debt

cash sweep

This is a covenant where a borrower promises a lender that they won’t put up any of their assets as collateral to other banks

Negative pledge