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FRM Part II · FRM Exam Part II · The Rise and Risks of Private Credit

A bank extends a $200 million NAV facility to a private credit fund whose portfolio is $1,000 million with existing fund-level debt of $400 million. If portfolio values fall 25% and the facility ranks equally with the other debt, what is the loan-to-value of total fund debt after the fall, and does the bank's facility remain covered by assets? Treat the $200 million as part of the $400 million total debt.

Loan-to-value rises to 53.3% (400/750) after assets fall to $750 million. Assets still exceed the $400 million of total debt, so the bank's facility remains covered, although the cushion has shrunk and covenant triggers could be approached.

  1. A53.3%; covered, since assets of $750 million exceed debt of $400 millionCorrect
  2. B40.0%; covered, since the fall does not affect leverage
  3. C80.0%; not covered, since assets are below debt
  4. D53.3%; not covered, since assets of $750 million are below debt

Explanation

Assets fall to 1,000 x 0.75 = 750. Debt stays 400, so LTV = 400/750 = 53.3%. Assets exceed debt, so the facility is covered, with a cushion of 350. 40% is the pre-fall LTV (400/1,000).

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