FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit
A private credit fund holds a portfolio of senior loans to mid-sized firms, all floating rate at SOFR + 500 bps. Borrowers' EBITDA is 2.0x their annual interest expense when SOFR is 2%. Assume debt and EBITDA are unchanged. Approximately what is the interest coverage ratio if SOFR rises to 5%, with the spread constant?
Interest coverage falls to about 1.40x. Initial all-in rate is 7%, so EBITDA equals 14% of debt. After SOFR rises to 5% the rate is 10%, and 14% divided by 10% gives 1.4x, showing how floating-rate loans transmit rate shocks into credit risk.
- A1.40xCorrect
- B1.00x
- C1.60x
- D2.00x
Explanation
Initial rate is 7%; coverage is 2.0x so EBITDA = 2.0 x 7% = 14% of debt. New rate is 5% + 5% = 10%. Coverage = 14%/10% = 1.40x. A 1.00x answer wrongly adds the 3% move to the coverage, while 2.00x ignores the floating reset.
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