Exam

PC303 final exam

20 questions · pass mark 70%

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

Question 1 of 20

Alder Ridge Logistics owes $2,338,194.44 of interest but pays the agent only $1,500,000 on the payment date. Kestrel Point Direct Lending Fund I, which holds 60% of the loan, expected $1,402,916.66. What should its operations team expect from the agent?

A The full $1,402,916.66, advanced by the agent from its own funds to keep the lenders whole B Notice of the shortfall, with the credit agreement deciding what happens next; the agent generally doesn't pay out money it hasn't received C The full $1,402,916.66, with the shortfall taken from the other lender's 40% share D A payment from the fund administrator, which covers any amount the borrower fails to pay

Question 2 of 20

Alder Ridge asks its lenders to waive a covenant for one quarter. Kestrel Point Credit is the administrative agent. What is the agent's role in the waiver?

A It decides whether to grant the waiver, because it knows the borrower best B It grants the waiver on behalf of all lenders, because its fund is the largest lender C It passes the request to each lender's fund administrator, which votes on the lender's behalf D It circulates the request, collects the lenders' votes and confirms whether the required majority has agreed

Question 3 of 20

A $75m loan pays Term SOFR + 550 bps with a 1.00% SOFR floor, on Actual/360. Term SOFR for a 92-day interest period is 0.80%. What interest is due for the period?

A $1,245,833.33 B $1,207,500.00 C $1,228,767.12 D $1,399,166.67

Question 4 of 20

An Alder Ridge interest period would end on a Saturday. The credit agreement moves period ends to the next business day, which is the following Monday. What is the effect on this period's interest on Actual/360?

A None, because interest is a fixed quarter of the annual amount B The rate is reset using Monday's Term SOFR fixing for the whole period C The period has two more days, so two more days' interest is due D Interest runs only to Saturday, and the two extra days are waived

Question 5 of 20

Kestrel Point Direct Lending Fund I agrees to sell $10m of its Alder Ridge position by assignment. The next interest payment date falls after the trade date but before settlement. Who does the agent pay the interest on that $10m to?

A The buyer, because the position moved to it on the trade date B Nobody, because interest stops accruing between trade date and settlement C The agent holds it until settlement and then splits it equally between the two D Fund I, which is still the lender of record; the trade terms decide who is entitled to the interest

Question 6 of 20

Fund I funds a $60m, 5-year loan at 98, so it has $1.2m of OID. In a simplified annual model, the cash coupon is $6.0m a year and the effective interest rate is 10.53%. Using the effective interest method, how much OID is accreted in year 1?

A $0.192m B $6.192m C $0.240m D $0.318m

Question 7 of 20

Kestrel Point Capital Corporation makes a new $50m loan, and the borrower pays a $1.0m closing fee at funding. An accountant proposes booking the whole $1.0m as income in the quarter the loan closes. What is the common treatment?

A Book it all at closing, because the cash has been received B Treat it as a reduction in the management fee the BDC pays C Treat it like OID and recognize it as interest income over the loan's life D Hold it as a liability and recognize nothing until the loan is repaid

Question 8 of 20

Fund I holds a $15m loan paying 11% PIK, compounding annually, with no cash interest. How much PIK interest income does it recognize in year 2, and what is the loan balance at the end of year 2?

A Income of $1.65m; balance of $18.30m B Income of $1.8315m; balance of $18.4815m C Income of $3.4815m; balance of $18.4815m D Income of $1.8315m; balance of $16.65m

Question 9 of 20

A borrower with a PIK toggle elects to pay this quarter's interest in kind, and the agent circulates the election. Fund I's loan system is not updated and still books the accrual as cash interest receivable. What is the likely result?

A Nothing, because PIK and cash interest are booked the same way B The agent pays the interest in cash anyway, because the fund's system expects it C The loan is automatically placed on non-accrual on the payment date D A break: the fund expects cash that never arrives, because the interest is added to principal

Question 10 of 20

A borrower is current on every payment, but it has started a restructuring and the manager now doubts the loan will be repaid in full. Under many funds' policies, what happens?

A The loan may be placed on non-accrual because full collection is in doubt, a judgment auditors review B Nothing, because a loan goes on non-accrual only once a payment is about 90 days past due C The fund keeps accruing, but books the interest as PIK instead of cash D The agent places the loan on non-accrual for every lender in the group

Question 11 of 20

Brookmere Home Services returns to accrual status after a restructuring and a period of sustained payments. When it went on non-accrual, Fund I reversed $1,500,000 of accrued interest. What commonly happens to that $1,500,000 now?

A It is reinstated as income in full in the quarter the loan returns to accrual B It is commonly not reinstated as income when the loan returns to accrual C It is restated into the two earlier quarters in which it was first accrued D It is claimed from the agent, which reimburses the lenders for reversed interest

Question 12 of 20

Kestrel Point Capital Corporation, a BDC that elects RIC tax status, reports net investment income of $14.0m for the quarter, of which $3.0m is PIK and $1.0m is OID accretion. What does this mean for its distributions?

A It can distribute only $10.0m, because PIK and OID accretion are excluded from taxable income B Nothing, because every dollar of NII is received in cash in the same quarter C About $4.0m of its income brought in no cash, so it may need other cash to pay distributions based on that income D It must retain the $4.0m to repay its credit facility before any distribution

Question 13 of 20

At quarter-end, Kestrel Point Capital Corporation holds investments at fair value of $900.0m, cash of $30.0m and interest receivable of $12.0m. It owes $450.0m of borrowings, an accrued management fee of $3.0m, an accrued incentive fee of $2.5m and other payables of $1.5m. It has 25.0 million shares outstanding. What is its NAV per share?

A $19.40 B $37.68 C $19.68 D $19.50

Question 14 of 20

Fund I's valuation team marks its loans at fair value including accrued interest. The fund administrator also records $5.0m of interest receivable in the NAV. What is the problem?

A None, because accrued interest belongs in both lines by design B Interest receivable should be recorded as a liability, not an asset C Accrued interest should be left out of NAV until the cash is received D The interest is counted twice; under many funds' policies fair values exclude accrued interest

Question 15 of 20

Greywater Capital Corporation, a fictional BDC, pays an income incentive fee with a quarterly hurdle of 1.5% of starting NAV, a 20% incentive rate and a full catch-up. Starting NAV is $240m and pre-incentive fee net investment income is $4.2m. What is the fee?

A $0.84m B $0.6m C $0.12m D No fee, because income is below the end of the catch-up

Question 16 of 20

Kestrel Point Capital Corporation's income incentive fee this quarter is much larger than in recent quarters. During the quarter, a large loan was repaid early at 102. What is the most likely explanation?

A The capital gains incentive fee was added to the income fee B The hurdle was calculated on NAV at the end of the quarter instead of the start C The prepayment premium and unamortized OID recognized on the repayment counted as income for the fee D The repaid principal was included in pre-incentive fee net investment income

Question 17 of 20

The agent's notice for a loan calculates interest at Term SOFR + 500 bps. Fund I's team checks the credit agreement, which says Term SOFR + 525 bps, matching the fund's loan system. What should the team do?

A Raise it with the agent, and log and track the break until it is resolved B Change the loan system to 500 bps, because the agent's notice is authoritative C Book the agent's amount as income and close the break D Write off the difference, because breaks caused by the agent are immaterial

Question 18 of 20

Fund I receives an email, apparently from a borrower, asking that future payments go to a new bank account. Which control is designed for exactly this?

A Reconciling positions to the agent's register each month B Reviewing each new loan's setup against the credit agreement C Having the fund administrator recalculate income each quarter D Confirming the change by a call-back to a known contact, with dual authorization of payments

Question 19 of 20

Why does a credit fund's capital account statement commonly show net investment income separately from realized and unrealized gains and losses?

A Because only net investment income is included in the LP's capital account B So the LP can see how much of its return came from income and how much from changes in value C Because gains and losses are reported only in the audited annual statements D So the LP can see how much of its commitment remains uncalled

Question 20 of 20

Two listed BDCs both lend to the same fictional borrower. How can an analyst compare how each values that loan?

A By asking each BDC's administrative agent for its internal valuation B By reading each BDC's private quarterly letter to its largest shareholders C From each BDC's public SEC filings, whose schedule of investments lists each holding with its cost and fair value D From the credit agreement, which sets the value at which each lender must carry the loan