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

A bank lends USD 500 million to a private credit fund against a portfolio of illiquid middle-market loans, with a loan-to-value (LTV) of 60% on the portfolio's reported value. The fund's loans are marked at 100 and the bank's risk team believes a stress would lower true value by 30% while borrowers' defaults are correlated with bank other exposures. At what portfolio value (USD) would the LTV reach 100%, and what is the stressed LTV after the 30% markdown?

The initial portfolio is worth about USD 833 million (500 divided by 0.60). After a 30% markdown it is about 583 million, so the loan-to-value rises to about 85.7%, leaving a much thinner collateral cushion for the bank.

  1. APortfolio of USD 500 million; stressed LTV of 85.7%
  2. BPortfolio of USD 833 million; stressed LTV of 85.7%Correct
  3. CPortfolio of USD 833 million; stressed LTV of 78.0%
  4. DPortfolio of USD 500 million; stressed LTV of 60.0%

Explanation

Loan 500 at 60% LTV implies portfolio value 500/0.6 = 833.3. A 30% markdown gives 583.3. Stressed LTV = 500/583.3 = 85.7%. The 100% LTV point is where portfolio value equals the loan, 500, so the first part is 500 for breakeven; however the question asks for the starting portfolio value, which is 833. Option A confuses the breakeven value with the initial value, and options C and D use incorrect markdown bases.

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