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

A fund's private loan portfolio is marked at USD 100 million with an average annual yield of 11% over a floating base rate that rose from 2% to 5% during the year. Borrowers' average EBITDA interest coverage, previously 2.4x on a 2% base rate, is now computed with interest costs that rose from 8.0% to 11.0% of debt. Assuming EBITDA and debt are unchanged, what is the new coverage ratio?

New interest coverage is about 1.75x. With EBITDA and debt unchanged, coverage falls in proportion to the rise in interest cost: 2.4 multiplied by 8.0 over 11.0 equals roughly 1.75. This shows how floating-rate private loans transmit higher base rates into borrower credit stress.

  1. A1.75xCorrect
  2. B2.40x
  3. C3.30x
  4. D1.20x

Explanation

Coverage is inversely proportional to interest cost: 2.4 × 8.0/11.0 = 1.745, about 1.75x. Leaving it at 2.4x ignores the rate rise; 3.30x inverts the ratio; 1.20x halves it arbitrarily.

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