Credit Risk

Question 1

Factors impacting credit risk

Answer 1

Ability to pay

Willingness to pay

Economic condition

Question 2

Define ability to pay

Answer 2

Cash flow/earnings coverage

Liquidity measures

Solvency measures

Question 3

Define willingness to pay

Answer 3

Not all debtors take their debt seriously

Mortgage or overdue bill

Question 4

Define economic condition

Answer 4

Affect ability to pay

Temporary (recession)

Permanent (decline of product)

Question 5

How creditors protect themselves

Answer 5

Setting out clear terms

Covenants

Collateral

Question 6

Define affirmative covenants

Answer 6

Requires:

-pay all required debt payment

-financial ratio, maintain interest coverage, minimum liquidity

• maintenance for collateral

-maintain legal compliance

-prepare and deliver audited f/s

Question 7

Negative covenants

Answer 7

Restricts:

-financial ratio may not exceed

-restriction on capex

-on selling collateral

Question 8

What are the common financial convents

Answer 8

Debt to equity/ debt to capital

Debt to ebitda

Interest coverage

Question 9

Credit rating process

Answer 9

Assess business risk

Assess financial risk

Assess financial policy

Compute score

Question 10

Ratios used to analyze profitability

Answer 10

Operating margin

Ebitda/ average total assets

Question 11

Ratio used to analyze leverage and cash flow coverage

Answer 11

Debt/ebitda

Funds from operations/debt

Ebit/interest expense