medium · FRM Part 2 Current Issues
An institutional risk manager is performing a 'reverse stress test' on a bank's exposure to the private equity/private credit ecosystem. They identify that the bank has provided 'subscription lines' (capital call facilities) to several funds.
Under what scenario would these facilities transform from low-risk bridge financing into high-risk credit exposure?
- When the fund manager departs, triggering a 'key person' clause written into the subscription facility's credit agreement.
- When the fund's asset values decline, causing a separate NAV-based facility to breach its loan-to-value covenant cap threshold.
- When the fund's underlying portfolio borrowers default on obligations, leading to a permanent impairment of the fund's committed capital base.
- When a systemic liquidity crisis causes the fund's LPs (e.g., pension funds, insurers) to default on their capital calls simultaneously.
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