Which of the following items is least likely of concern to the analyst when trying to assess the ability of the firm to pay its debt? A) Material adverse change clause. B) Back-up credit facilities. C) Third-party guarantees. D) Affirmative covenants. What the hell is “Material adverse change clause!!!”
isn’t it in a merger when you can back out if something materially changes in the company you’re buying? like i dunno, BAC buying countrywide… maybe they’ll try to bail on the merger b/c countrywide has become even junkier than it was in the first place when BAC oddly said sure, i want to buy that crap company? i want to say it’s something like that. i like answer D here. can’t see how an affirmative covenant would be a concern of an analyst… the rest, could be concerns?
But why wouldn’t D be a concern? Affirmative covenants are -if im not mistaken- things that the company MUST do, ex. allocate 20% of revenues to Creditor X…
affirmative covenants are stuff like the company will pay taxes when due and will pay interest and principal on a timely basis. so they are obligations but (and i could be WAY off here) they’re asking about the ABILITY to pay and the covenant doesn’t really mess with the ability, does it? i want to say the covenants are more like the obligation? but i feel like all of the other ones would tweak a companies ability to pay, either good or bad, no? is D even right?
by process of elimination I say A
the ans. is D
even a blind squirrel finds a nut once in a while!
MAC ~ is put into a credit agreement so if anything that materially adverse happens the creditor can call a default and call the loan due.
Material adverse change clause allows a lender to refuse to provide funds to the borrower if they feel the financial or operating condition of the borrower has deteriorated - per the CFAI text. It is classified under the “capacity” to pay, therefore bannisja is on point and goes on to level 3!
LOL, i wish. so what does an affirmative covenant fall under then? ohhh, looking it up it makes sense now. what are they- collateral, capacity, (just had to grab my stack of notecards), character, and COVENANTS! so i guess the key here is know those 4 c’s and it’s like those annoying fraud triangle questions trying to figure out if it’s attitude or incentive or rationalization or opportunity etc. lucky guess for me!