HOFIS Ch11

Question 1

Compare and contrast pro rata and institutional loans.

Answer 1

1. Pro rata loans that are distributed to banks and usually involve the revolving line
   of credit and shorter maturity term loans
2. Institutional loans that are distributed to nonbank institutional investors and
   typically include longer-maturity term loans

Question 2

What is a leveraged loan?

Answer 2

Leveraged Loans - a loan made to a company whose credit rating is speculative
grade

Question 3

What is the lowest investment grade rating based on Fitch’s rating system?

Answer 3

BBB-

Question 4

What is a syndicated loan? State two advantages of using a syndicated loan.

Answer 4

Syndicated loan - a single loan with a single set of terms, but multiple lenders,
each providing a portion of the funds

Two advantages of syndication of a loan from borrower’s perspective:
1. Allows corporate to negotiate loan terms once, while at the same time having access
to multiple lenders
2. Avoids conflicts in priority from arising that might otherwise occur if the borrower
serially negotiated loans

Question 5

Identify and explain the two methods by which loans in the secondary market change
hands.

Answer 5

By assignment - buyer becomes the lender of record with all related rights and
powers

By participation - buyer receives the right to repayment but the original lender
remains the lender of record (greater credit risk)

Question 6

What are the five purposes of covenants?

Answer 6

1. Preservation of capital
2. Appropriation of excess cash flow
3. Control of business risk
4. Performance requirements
5. Reporting requirements

Question 7

Describe how leveraged loans can help mitigate risks for investors

Answer 7

Covenants
Ÿ Must be satisfied by the loan issuer

Senior secured loans are the top of the borrower’s capital structure

Broad syndication spreads risk to multiple lenders

Empirical results show that ultimate recovery rates were higher for loans
(compared to bonds)

Question 8

State the key characteristics of a leveraged loan.

Answer 8

A loan made to a company whose credit rating is speculative grade

Loans that are broadly syndicated (10+ bank and nonbank investors)

Senior secured loans that are at the top-most rank in the borrower’s capital
structure

Larger loans to larger companies