Question:
A debt covenant designates one of a holding company’s subsidiaries as restricted. Which of the following credit-related considerations does this covenant address?
A
Structural subordination.
Explaination
Restricted subsidiaries are those whose cash flows and assets are designated to service the debt of their holding company. Classifying a subsidiary as restricted alleviates structural subordination by making holding company debt rank pari passu with the subsidiary’s debt.
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