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IBBC CAPITAL ACADEMY / 2027

Corporate credit: cash coverage and claim priority

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Explain operating resilience using mechanisms and limitations.
  • Explain coverage and leverage using mechanisms and limitations.
  • Explain recovery structure using mechanisms and limitations.

Draft · approximately 25 minutes, excluding further revision.

Operating resilience

Credit analysis begins with business durability, competitive position, management and cash generation, then considers financing; a favorable ratio alone is insufficient.

Interest coverage compares a defined earnings or cash measure with interest expense; EBITDA coverage excludes capex and working-capital needs.

Coverage and leverage

Debt/EBITDA approximates leverage but can mislead for cyclical peaks, negative EBITDA or inconsistent lease treatment; use normalized cash flows and maturity schedules.

Liquidity includes cash, usable committed lines and near-term uses; profitable firms can fail when obligations arrive before accessible funding.

Recovery structure

Secured, senior unsecured and subordinated claims can recover differently under actual law and asset values; priority does not create additional enterprise assets.

An issue rating can differ from an issuer assessment because collateral and seniority change loss severity; evaluate guarantees and structural subordination explicitly.

Formula and assumptions

Interest coverage=EBIT/interest; leverage=debt/normalized EBITDA

Original applied case: Corporate credit: cash coverage and claim priority

  1. EBIT is 72, interest 12, debt 240 and normalized EBITDA 80.
  2. Interest coverage=6 times; debt/EBITDA=3 times under these definitions.
  3. Assess maturities, cash conversion and downturn sensitivity rather than treating either ratio as an approval threshold.

Errors to catch

  • Do not assume: Credit analysis requires only the share price.
  • Do not assume: EBITDA coverage includes every capex payment.
  • Do not assume: Debt/EBITDA is meaningful with any negative denominator.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.