Exam

PC101 final exam

20 questions · pass mark 70%

Answer every question, then check your answers. The pass mark is 70%.

Question 1 of 20

An analyst lists four recent financings. Which one is the clearest example of private credit as this course defines it?

A A bank arranges a large floating-rate loan and sells pieces of it to CLOs, which then trade them B A fund negotiates a senior secured loan directly with a sponsor-owned company and plans to hold it until repaid C A company sells fixed-rate high-yield bonds to many institutional investors under Rule 144A D A commercial bank lends to a long-standing client under a revolver and keeps the loan on its balance sheet

Question 2 of 20

In 2015 a private equity firm wanted to fund a buyout of a mid-sized company with debt of about 7x EBITDA. Its relationship bank would lend much less, but a direct lending fund provided the full amount at a higher spread. What best explains the difference?

A Post-crisis bank rules, including the 2013 leveraged lending guidance, discouraged the loan at banks but did not apply to funds B Basel III banned banks from lending to any company whose total debt was above 5x EBITDA C Direct lending funds could borrow from the central bank at lower rates than commercial banks could D The Dodd-Frank Act required private equity buyouts to be financed only by non-bank lenders

Question 3 of 20

Interest rates rose sharply in 2022 and 2023. Why did this help private credit attract more money from investors?

A Higher rates made private loans easier to sell quickly on public exchanges B Higher rates meant private loans no longer needed covenants to protect lenders C Private loans are floating rate, so the income they paid rose along with rates D Higher rates guaranteed that private borrowers would not default on their loans

Question 4 of 20

A borrower's advisers compare a broadly syndicated loan (BSL) with a private unitranche loan for the same company. Which feature is more typical of the private loan than of the BSL?

A A credit rating, with prices quoted by dealers after closing B An arranger's right to use market flex to change terms before closing C A lower spread, because the loan is sold to many investors D At least one maintenance covenant, often tested every quarter

Question 5 of 20

A direct lender is weighing two loans of similar size: one to a sponsor-backed company in a competitive process, and one to a founder-owned manufacturer it found itself. What would it typically expect from the founder-owned deal?

A A guarantee from the owner's private equity sponsor if the company cannot pay B A lower spread, because companies without a sponsor carry less credit risk C More work to source and gather information, but less competition and often a higher spread D A faster process, because founders usually run structured auctions among many lenders

Question 6 of 20

A sponsor buying a company plans to fund several add-on acquisitions over the next two years. Which part of a private loan package is designed for this?

A A PIK toggle that lets the company pay interest in kind B A non-call period that stops the loan being repaid early C An equity cure right that lets the sponsor fix a covenant breach D A delayed-draw term loan that the company can draw later

Question 7 of 20

A manager wants a vehicle that lets individual investors buy and sell shares on a stock exchange, invests mostly in US private companies, and pays out most of its income as dividends. Which vehicle fits best?

A A closed-end limited partnership fund that uses capital calls B A publicly traded business development company (BDC) C A separately managed account run for a single investor D A rated note feeder built for insurance companies

Question 8 of 20

A life insurer invests in a direct lending fund through a rated note feeder rather than directly as a limited partner. What is the main reason?

A Rated, senior exposures usually need less regulatory capital, so its capital charge is lower B Rated note feeders let the insurer redeem its investment on any business day C Rated note feeders remove the credit risk of the loans the fund makes D Insurers are not allowed to invest in limited partnerships of any kind

Question 9 of 20

A company has a first lien term loan and a second lien term loan secured on the same collateral. Which document sets out that the first lien is paid in full from the collateral before the second lien receives anything?

A The compliance certificate the borrower delivers each quarter B The non-binding term sheet agreed before documentation C The quality of earnings report prepared in due diligence D The intercreditor agreement between the two lender groups

Question 10 of 20

A loan pays SOFR + 600 bps with a 0.75% SOFR floor. What is the interest rate if SOFR is 0.40%, and if SOFR is 2.00%?

A 6.40% and 8.00% B 6.75% and 8.00% C 7.15% and 8.75% D 6.75% and 6.75%

Question 11 of 20

On a $60 million term loan, Lender X funds $58.8 million and the borrower owes $60 million. Lender Y funds the full $60 million and charges a 2% upfront fee at closing. How do the two compare for the lender?

A X earns only 1.2 points of OID, which is less than Y's 2% fee B Y's fee counts toward the lender's return, but X's discount does not C They are roughly the same: each gives the lender 2 points, or $1.2 million D X is better, because the OID is charged again in every year of the loan

Question 12 of 20

SOFR is 4.00%. Offer 1 is SOFR + 550 bps issued at 97. Offer 2 is SOFR + 600 bps issued at 99. Using the market shorthand with a 3-year assumed life, which offer has the higher all-in yield?

A Offer 1, at 10.50% against about 10.33% for Offer 2 B Offer 2, at 10.00% against 9.50% for Offer 1 C Offer 1, at 12.50% against 11.00% for Offer 2 D Neither, as both work out at about 10.42% once OID is spread

Question 13 of 20

A borrower has $240 million of debt and $48 million of EBITDA. Its maximum total leverage covenant is 6.50x. Holding debt constant, roughly how far can EBITDA fall before a breach?

A About 30% B About 23% C About 15% D About 35%

Question 14 of 20

A credit agreement lets the borrower add debt only if leverage after the new debt is at or below 5.00x. It has no other financial covenant. EBITDA falls and leverage drifts from 4.5x to 6.2x, but the borrower takes on no new debt. What is the position?

A The borrower is in breach, because leverage is above 5.00x at quarter-end B The lender can accelerate, because leverage has risen by more than 1.0x C The covenant automatically resets to 6.50x to give the borrower room D No breach, because this incurrence test applies only when the borrower acts

Question 15 of 20

Ignoring fund fees, which portfolio has the higher expected annual return after credit losses? Portfolio X has an 11.0% all-in yield, a 4% default rate and 40% recovery. Portfolio Y has a 9.5% all-in yield, a 2% default rate and 70% recovery.

A Portfolio X, at about 9.4% against 8.1% for Portfolio Y B Portfolio X, because its 11.0% yield already covers any losses C Portfolio Y, at about 8.9% against 8.6% for Portfolio X D Portfolio Y, at about 7.5% against 7.0% for Portfolio X

Question 16 of 20

A manager's loan book shows almost no credit losses over several years of steady economic growth. Why should an investor be cautious about using that record to estimate future losses?

A Defaults tend to cluster in recessions, so a benign period can understate the risk B Credit losses are only counted once a loan reaches its legal maturity date C Senior secured loans cannot default while the wider economy is growing D Loss rates are set by regulators, so past figures are never comparable

Question 17 of 20

During a market sell-off, an investor wants to exit its holding in a publicly traded BDC quickly. What liquidity risk is it most likely to face?

A Its redemption request will be gated and paid out over later quarters B It can sell its shares, but possibly at a price well below the loans' value C It must wait until the loans are repaid at the end of the fund's life D It cannot sell at all, because BDC shares are not permitted to trade

Question 18 of 20

An evergreen fund lets investors come and go at its reported NAV. Its loan marks lag reality, and NAV is higher than the loans are really worth. Which group is disadvantaged as investors redeem?

A Investors who redeem, because they receive less than their share is worth B The borrowers, because their interest rates are reset to match the NAV C The manager, because its fees fall whenever NAV is set too high D Investors who stay, because leaving investors are paid out too much

Question 19 of 20

Which sequence shows the usual order of stages in a private loan's lifecycle?

A Screening, investment committee, due diligence, origination, closing B Origination, due diligence, screening, closing, investment committee C Origination, screening, due diligence, investment committee, closing D Origination, screening, investment committee, closing, due diligence

Question 20 of 20

A struggling borrower's loan is amended so that part of its cash interest is paid in kind instead. Why might this concern an investor in the lending fund?

A The fund records the PIK interest as income although it receives no cash for it yet B PIK interest is always charged at a lower rate, so the fund's reported income falls C The amendment turns the loan into equity, which dilutes the fund's own investors D PIK interest is paid in the borrower's shares, which the fund must sell at once