CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers
In a syndicated loan, the lenders' protection that most likely limits the borrower from taking on additional debt beyond a set leverage ratio is best described as a:
A negative covenant best describes a restriction on taking additional debt beyond a leverage limit. Negative covenants limit borrower actions to protect lenders. A commitment fee is a charge on undrawn credit, and a bullet repayment concerns principal timing, not borrower restrictions.
- Anegative covenantCorrect
- Bcommitment fee
- Cbullet repayment
Explanation
Negative covenants restrict borrower actions, such as issuing more debt above a leverage limit, paying excess dividends or selling assets. A commitment fee is a charge on undrawn amounts, and a bullet repayment is a repayment structure, not a restriction.
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