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// EXAM HALL25 QUESTIONS · 30 MINUTES

Credit Portfolio Manager Practice Test

The credit after the money is out: what a book's average hides, which file to open first, and who will be unhappy when you downgrade.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A credit portfolio manager practice test asks whether you can own a book after the money is out, and notice it drifting before anyone wants to hear it. This paper has four parts: grade migration, covenant headroom and expected loss; a book of eight files set on an exhibit, to rank and read; early warning signals; and calls on sector limits, annual reviews and working with the front line. Every question is original, and none comes from any bank's test. Sit it against a thirty-minute clock, or take it as practice.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// HOW TO SIT IT

Answer below as practice, and each read opens as you go. Or sit it as a test: 30 minutes, with every read held back until you finish.

PART A

The measures

What a book's numbers show, and what they hide.

PART A · QUESTION 1

Over a year, 12 of a book's 40 files moved down a grade, and 2 moved up. The previous manager's note says: 'Book stable. Average grade almost unchanged.'

What do you read?

PART A · QUESTION 2

A covenant caps debt at 3.5 times EBITDA. Debt is US$21m, and EBITDA is US$6.4m.

How far can EBITDA fall before the covenant is breached?

PART A · QUESTION 3

Two US$10m loans. File X has a 1% chance of default in a year and would lose 60% if it did. File Y has a 3% chance and would lose 20%.

Which carries the higher expected loss?

PART A · QUESTION 4

A term sheet offers three protections: a negative pledge, a quarterly leverage covenant, and monthly management accounts.

Which is likely to show deterioration first?

PART A · QUESTION 5

A loan was priced two years ago, when the borrower was rated strongly. Its rating has since slipped two notches and its leverage has risen. The margin has not moved, and the relationship manager says repricing would upset a good client.

Your move?

PART B

The book

Your first weeks, nine questions. Read every note before you pick a file.

EXHIBIT AE · THE BOOK

Eight of the largest files on a book you inherited this morning. Exposure in US$m, US$48m in all. Grades run from 1, the strongest, to 8.

FileUS$mGradeReviewed
1. Dairy processor9.043 months
2. Offices8.0419 months
3. Developer7.055 months
4. Warehouses6.032 months
5. Building supplies6.0410 months
6. Food exporter5.034 months
7. Road freight4.058 months
8. Aged care3.061 month
What each file shows
FileNote
1Trading well. Leverage covenant breached by 0.1 times after a small purchase. Waiver requested.
2An office landlord. Net rent US$1.2m a year, US$0.5m of it from a tenant whose lease ends in seven months. Debt service US$0.9m.
3An apartment developer. Two of its last three projects ran over budget. Every loan so far repaid on time.
4A warehouse landlord. Fully let on long leases. All covenants pass.
5A wholesaler that sells to builders. Monthly accounts three weeks late, three months running. The overdraft used to swing; it has sat near its limit for three months.
6All covenants pass. Trading on budget.
7Downgraded last year. On plan since.
8On the watchlist. Six months into a restructured plan, and keeping to it.
PART B · QUESTION 6

From Exhibit AE.

How much of these eight files would move with the property market?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 7

Exhibit AE is your new book. You can open one file properly before lunch.

Which one?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 8

Exhibit AE's File 1 breached its leverage covenant by 0.1 times after a small purchase. It is trading well. The relationship manager wants the waiver signed today.

What do you do?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 9

On Exhibit AE's File 5, the relationship manager says: 'The numbers are late because their accountant is busy.'

What is your response?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 10

From Exhibit AE's File 2.

What is debt service cover if the tenant leaves and nobody replaces it?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 11

You have finished Exhibit AE's File 2 review, and you think it is a 6 and not a 4. A downgrade raises its provision, and the regional head asks you to wait until after quarter end.

What do you do?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 12

Exhibit AE's File 3 asks for a further US$4m project loan. Two of its last three projects ran over budget. The banker notes that every loan so far has been repaid on time.

What do you ask first?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 13

Exhibit AE's File 8 has kept to its restructured plan for six months. The relationship manager asks you to take it off the watchlist.

What do you do?

BACK TO EXHIBIT AE ↑
PART B · QUESTION 14

Exhibit AE's File 7 was downgraded last year. Its audited numbers now put cover and leverage back where they were before the downgrade. The relationship manager asks for the old grade back.

What do you do?

BACK TO EXHIBIT AE ↑

PART C

The signals

Mostly no breach and no missed payment. Which would you pick up the phone for?

PART C · QUESTION 15

For six years a borrower's monthly accounts have arrived by the 10th. This month they come on the 24th, complete and unremarkable.

Signal or noise?

PART C · QUESTION 16

A borrower who has paid on time for nine years asks to move its monthly management accounts to quarterly.

Signal or noise?

PART C · QUESTION 17

For five years a borrower's overdraft has swung between US$200k and US$900k every month. For the last three months it has sat between US$850k and US$900k.

Signal or noise?

PART C · QUESTION 18

A borrower changes auditor for the second time in three years, each time citing fees. The new firm is much smaller.

Signal or noise?

PART C · QUESTION 19

Your book's grades have held for a year, and arrears are down. Covenant waivers have gone from three a quarter to eleven.

Signal or noise?

PART C · QUESTION 20

A borrower's leverage covenant has been reset twice in two years, each time to just above its latest figure.

Signal or noise?

PART C · QUESTION 21

Every autumn for six years, a food exporter's overdraft has climbed near its limit for about ten weeks while it buys the season's crop, then fallen back. This year it has done the same, on the same dates, and its debtors and stock are in line.

Signal or noise?

PART D

The calls

You own the file. Somebody else owns the client.

PART D · QUESTION 22

Your property limit is full. A banker suggests recoding a strong apartment developer as 'construction services', which has room. 'They do build things,' the banker says.

What do you do?

PART D · QUESTION 23

A draft annual review on your book has last year's words with this year's numbers dropped in. Revenue is down 8%. The text still says 'steady trading'.

What do you do?

PART D · QUESTION 24

You want to ring a borrower's finance director about late numbers. The relationship manager objects: 'I own the client. You own the file.'

What do you do?

PART D · QUESTION 25

A borrower asks the bank to release its warehouse from security so it can sell it, saying the proceeds will 'strengthen the balance sheet'. The warehouse is a third of the bank's security.

Signal or noise?

0 OF 25 ANSWERED · 0 WITH THE SENIOR READ · 0 STANDS UP · 0 OFF THE LINE

// THE REST OF THE ROUND

Every question here is original; none is any bank's real test. Written for: Portfolio manager.