What is the purpose of testing debt service under stressed scenarios?

• A. To maximize loan size
• B. To speed up funding
• C. To identify reserve strategies and verify covenant viability
• D. To reduce documentation

Answer: (C)

Testing debt service under stressed scenarios focuses on whether a borrower can continue to cover debt payments when conditions deteriorate. This helps reveal whether there are sufficient reserves or liquidity strategies to bridge shortfalls and whether covenants would remain satisfied if earnings or cash flow decline, rates rise, or expenses increase. In practice, this informs whether the loan structure, reserve requirements, and covenants are prudent under adverse conditions, guiding safeguards like cash buffers, liquidity facilities, and covenant thresholds. The other options aren’t the aim of stress-testing debt service: it isn’t about increasing loan size, speeding up funding, or reducing documentation.