Debt valuations come under fire

March 12, 2024

Last year was all about equity valuations but now debt is in the sights of investors and regulators

Did any of you catch this article Flawed Valuations Threaten $1.7 Trillion Private Credit Boom (wealthmanagement.com) at the end of February?

“Values are especially cloudy outside the US, because of poor transparency. And it’s the same for loans made by funds that don’t publish quarterly updates or where there’s a single lender with no one to judge them against.”

It’s worth a read, as the detail is good.  Essentially interest rate rises have led to investors questioning the lack of volatility in the prices of private debt

Of course, if the debt is not tradeable, crystallization of losses on a debt portfolios is not the major issue and where companies can meet interest repayments, investors can sleep at night until the capital has to be repaid.

There is a problem when the coupon it linked to interest rates which leaves companies struggling to pay their debts.  Just as with equity valuations, the loan has to be impaired and that is not nice as more may move to junk status than people want.

For investors wanting to mark their book to market, this has created a problem.  It also has a knock-on effect on the value of any equity holdings in the same business.   Think of all those leveraged private equity deals and even VC ones.

Where smaller companies have CLNs questions should be asked. I am noodling the problem of complex preferred shares which even if technically equity, arguably are more debt like given their position in a distribution of assets by a company.  There is also the problem of rolled up coupons as this pushes the equity further down the waterfall.

Meanwhile, yesterday NatWest announced that it is going to prove rapid loans of up to £250,000 to SMEs.  Barclays is already pretty speedy making loans when it wants to. That is great news, but it will mean that more companies are indebted going forward with a knock on effect on equity values.

My instinct is that this will keep putting knock-on on equity valuations which I know is the largest issue for many of your clients.

I am not sure you know that we can value debt instruments as well as equity ones. If one of your clients has a valuation requirement do give us a buzz, especially if it is urgent or complex or both!  We love solving valuation challenges.