CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt
Which feature of a senior secured direct loan most likely helps limit the credit loss to the lender if the borrower's performance deteriorates?
Restrictive financial covenants and collateral security best limit credit loss. Covenants allow the lender to act early when performance weakens, and security over assets raises recovery if default occurs. Infrequent valuation merely delays recognition, and warrants add upside rather than downside protection.
- ARestrictive financial covenants and collateral securityCorrect
- BA longer interval between valuation dates
- CA higher proportion of equity-like warrants
Explanation
Covenants let the lender intervene early, and collateral improves recovery on default. Less frequent valuation only hides losses. Warrants add upside but do not protect against loss.
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