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

A private credit fund holds a portfolio of senior loans that pay SOFR plus 600 bps, with SOFR reset quarterly. The borrowers have a weighted average interest coverage ratio of 2.0x when SOFR is 2.0%. SOFR then rises to 5.0% while EBITDA and debt stay unchanged. Ignoring hedges, what is the new interest coverage ratio?

Coverage falls to about 1.45x. Initial all-in rate is 8% with coverage 2.0x, implying EBITDA of 16 per 100 of debt. After SOFR rises to 5%, the rate is 11%, so coverage is 16 divided by 11, roughly 1.45x, showing floating-rate credit risk transmission.

  1. A1.45xCorrect
  2. B1.00x
  3. C1.60x
  4. D0.73x

Explanation

Initial rate is 8.0% (2%+6%), coverage 2.0x, so EBITDA = 2.0 x 8 = 16 per 100 of debt. New rate is 11.0%, so coverage = 16/11 = 1.45x. Using 1.00x or 0.73x errs in the arithmetic. The 1.60x mistake comes from applying only part of the rate rise.

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