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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

A fund's portfolio has total debt of 1,000 with a 9% all-in floating rate when the base rate is 4%. EBITDA is 150 and is expected to stay flat. Management defines distress as interest coverage (EBITDA/interest) below 1.2x. By how many percentage points would the base rate need to rise from 4% for coverage to reach exactly the 1.2x threshold, assuming spread unchanged?

The base rate must rise by 3.5 percentage points. Coverage of 1.2x with EBITDA of 150 means interest of 125, which is 12.5% of 1,000 of debt. The current all-in rate is 9%, so the required increase is 3.5 points.

  1. A3.5 pointsCorrect
  2. B1.5 points
  3. C4.0 points
  4. D2.5 points

Explanation

Threshold interest = 150/1.2 = 125, or 12.5% of debt. Current rate is 9%, so the increase is 3.5 points (base from 4% to 7.5%). A 1.5 point answer is the gap from 9% to 10.5% (coverage 1.43x misread), and 4.0 uses wrong base.

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