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Credit Analyst / Commercial Banking Interview Questions

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How do you calculate leverage?

Debt divided by EBITDA. Net leverage is net debt divided by EBITDA. There are multiple permutations of this and they will usually be some variant of operating cash flows.

How do you calculate interest coverage?

EBITDA divided by interest expense. There are various permutations of this, including a fixed charge ratio coverage and pre-rent figures.

At the top of the capital stack may be a borrowing base facility – what does this look like?

Secured lending facility which may extend credit relative to available collateral. A generic borrowing base facility may mean that a borrower may borrow against the value of 75% of receivables and 50% of inventory. Accordingly, the lender should always be overcollateralized and have low risk of loss.

Should a cyclical company have more or less debt, all things equal?

Less because the cash flows are less stable making it less reliable for debt service – especially for amortizing debt.

What is structural subordination?

Although not explicitly subordinated contractually, claims can be structurally subordinated depending on where it sits in a broader organizational structure.

For example, if a holding company has $300 million of senior debt and has an operating company (OpCo) with $100 million of unsecured, junior debt but the assets are at the OpCo, if the OpCo goes bankrupt and there are no legal protections or upstream guarantees in place, the unsecured debt at the OpCo may get paid out first ahead of the HoldCo debt.

This is why you often see HoldCo’s having one notch lower credit ratings versus the OpCos (so for example Holdco or the parent company is BBB+ while the OpCo where the assets are is A-)

How are unsecured bank revolvers for investment grade companies protected against a company issuing secured debt?

Negative pledge – usually as a junior compliance commercial or corporate banker you will look through credit agreements to make sure this is in place. Similar protections for investment grade bonds that are senior unsecured.

What is negative pledge?

A key feature in many debt documents – this appears in credit agreements for unsecured senior debt where if the borrower pledges a security interest in any of its assets to any other new creditor, it must also include the existing unsecured debt as a beneficiary of that pledge (so the unsecured creditor is no worse off)

There are limits and baskets up to a certain threshold where this does not apply

What is a guarantee?

A binding agreement to service the debt of a third party if it is not able to pay. This is a commercial law concept – an example would be a levered subsidiary that is unable to raise any more debt. Banks do not have recourse to the parent company because it is a shareholder. If the parent company has better credit standing, a guarantee by them in case the subsidiary cannot service the debt may be sufficient in terms of the sub getting a loan.

What is non-recourse debt?

The debt is tied to the project or asset only and the bank or creditor does not have recourse to the corporation or entity that owns the project. This is in some ways the opposite of a guarantee.

For some jurisdictions, a mortgage on a house is a non-recourse loan. If the owner is underwater on the property, they just drop off the keys and the bank forecloses.

What are some examples of covenants?

  • Positive covenants
  • Negative covenants
  • Financial covenants

What are some examples of positive covenants?

Have to report financials within 30 days of quarter end, have to report annual financials within 90 days.

Have to buy insurance for the company.

What are some examples of financial covenants?

  • Debt/capitalization (book capitalization)
  • Debt/EBITDA (leverage covenant)
    • And variations Debt/EBITDAX, Debt/EBITDAR
  • Fixed Charge Coverage Ratio
  • Interest Coverage Ratio (coverage covenant)

What is a restricted payments covenant?

Lenders want money to be kept in the firm and for there to be minimum leakage to stakeholders subordinated in the capital stack (for example interest payments to junior debt, dividends to preferred shareholders and share repurchases) – as such they will want to make sure that these payments cannot be made unless the company is sufficiently healthy.

Usually, this involves a basket. Accordingly, certain payments can only be made if it can pass the Restricted Payments Test.

An example of a basket would be as follows:

A $10 million general carve out for restricted payments

plus: 50% of net income, 100% of proceeds from issuance of common or preferred equity, 100% of proceeds from junior or subordinated debt

less: 100% of net losses, 100% of dividends, 100% of share repurchases, 100% of repurchases of junior debt, 100% of amounts loaned to unrestricted subsidiaries (as the creditor does not have recourse to these)

What is Altman’s Z-Score?

Bankruptcy predictor model/equation that many commercial banks use.

It is a function of: working capital/total assets, retained earnings/total assets,, earnings before interest and tax/total assets, market equity to book value of liabilities and sales/total assets

What is a forbearance or standstill agreement?

Agreement by creditors not to take action for a period of time when the debt is in default.

What is the difference from a credit perspective between a specific collateral pledge for a bond versus a first lien over all assets?

You would prefer the first lien (1L) charge over the assets as if the liability exceeds the value of the collateral, the residual claim is lumped together with the rest of the unsecured creditors.

ex investment banking associate

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