Deloitte

Valuation
Conference
Private debt
valuation

January 2015

15 March 2016
© 2015
2016 Deloitte Tax & Consulting
Is Debt hard to Value?
Three things to remember
Initial Payment

LENDER BORROWER

Flow of
Repayments

Known principal

Pre-agreed interest Payoff

Settled in Cash
Debt Valuation
Known maturity Timing

Certainty Risk
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2016 Deloitte Tax & Consulting 2
Private debt valuation
Debts and their characteristics
Interest rate Base rate Credit spread

Fixed vs. Floating Function of risk

Maturity Credit rating

Currency

Probability of default
What’s risk in the
context of debt X Credit Spread
issuance?
Loss given default

10 chances out of 10 to be repaid at maturity 0%

Probability
Probability of default? 9 chances out of 10 to be repaid at maturity 10%
of default
8 chance out of 10 to be repaid at maturity 20% 10% Credit
X
Spread
50%
I loose half of the amount in case of default 50% 5%
Loss given
Loss given default?
default
I loose everything in case of default 100%

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2016 Deloitte Tax & Consulting 3
Private debt valuation
What can affect risk?

Issuer balance sheet structure Risk Expected

Level Return

Common Equity

Quality of assets
Capacity to
generate cash Preferred Equity
flows to repay the
debt

Mezzanine Debt Debt ranking in

financing
Assets structure as a
major risk
Subordinated Debt component

Securities can
reorder priority of
claims for specific Senior unsecured
assets Debt

Senior secured Debt

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2016 Deloitte Tax & Consulting 4
 Private debt valuation
Multiple elements to the valuation framework for private debt vehicles

Applicable regulations, standards, policies & guidelines

to consider

1 2 3 4 5

Local laws and Accounting

EU laws and Valuation
regulations standards Fund prospectus
Requirements regulations guidelines (IVS,
(Law applicable to (LUX GAAP, IFRS, valuation policy
(AIFMD, etc.) IPEV, etc.)
fund, etc.) etc.)

Underlying /
collateral /
Context

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2016 Deloitte Tax & Consulting 5
Private debt valuation
Valuation decision tree Valuation
Principle?

FAIR
COST
VALUE

Loan traded in an Impairment

active market? trigger?

Yes No Yes No

Performing?

Yes No

Prices or Discount
Restructuring Liquidation
quotes rate analysis

DCF Liquidation /
Cost
valuation collateral value

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2016 Deloitte Tax & Consulting 6
Private debt valuation
Discount rate estimate, the main challenge

Discount rate Risk free rate Credit spread

Observable ???

In case of private
debt…

• The main DCF challenge consists in

determining an adequate credit spread in the
absence of observable market data for private No observable market No credit rating
debt issuers… credit spread available

• Specific techniques have to be used to

estimate this rate by reference to market data
available for companies comparable the issuer
of the private debt…
How to assess
credit spread?

1 2
Fundamental Structural
approach approach

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2016 Deloitte Tax & Consulting 7
Private debt valuation
Fundamental approach

5
Derive credit
How to assess spread
credit spread?
4 • Analyze spreads
from comps
Form benchmark
• Conclude on credit
3 • Identify adequate spread applicable
comparable issues and adjust if
Derive credit rating necessary for point
• Similar credit
difference
2 • Approach rating, instrument
comparable to characteristics, etc.
Assess credit risk
credit rating
agencies
1 • Financial analysis
Collect issuer focused on • Scoring model
information capacity to repay
debt
using various
criteria with
A+
• Micro and macro different weights
economic data • Industry specific
• Historical and
ratios and metrics AAA
C
CC-
forecast
information
• Financial and non-
financial data D- BBB+
BB
© 2015
2016 Deloitte Tax & Consulting 8
Thank you for listening
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