medium · Debt Capital Markets credit-ratings-risk
A company has $500 million of debt at par. If the market price of the debt drops to 80 (distressed levels), how does this affect the Total Leverage Ratio calculation for an incurrence test in a standard credit agreement?
- The company must use the lower of par or market value
- Leverage decreases because the market value of the debt is lower
- Leverage increases because a price of 80 signals higher risk
- No change; leverage is calculated on the par value of the debt
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