KBRA Releases Research – Private Credit: BDC Portfolio Valuations are Rigorous
May 20 2024 - 10:38AM
Business Wire
KBRA releases research that examines business development
companies' (BDC) valuation processes.
KBRA’s analysis of a large sample of BDC investment portfolios
indicates minimal variance among BDCs in their independent
valuations of identical assets (despite some isolated examples). In
other words, BDCs’ analytical approaches to valuations are
generally consistent across the industry. In addition, given robust
internal valuation processes, as well as oversight from outside
auditors and the Securities and Exchange Commission, and engagement
of independent third-party valuation firms with extensive
analytical processes and access to proprietary datasets, we view
Level 3 asset valuations as well considered and appropriate for
analytical purposes.
Key Takeaways
- KBRA analyzed a sample of BDC loans via market data platform
provider SOLVE Advantage’s database to demonstrate that isolated
incidents cannot be used to make larger inferences about the
reliability or validity of BDC loan valuations.
- The analysis included a review of the valuation process of
KBRA-rated BDCs as well as interviews of independent valuation
firms to provide further insight.
- KBRA believes the valuation processes of its rated BDCs are
appropriately rigorous and accountable. That said, we recognize
that valuations can become more challenging in periods of greater
economic and market stress.
- The illiquid nature of investment portfolios can lead to more
varied valuations among BDCs, particularly for underperforming and
distressed loans, given reasonable differences of opinion regarding
underlying financial forecasts, equity sponsor behavior, outcomes
of restructuring/bankruptcy proceedings, and collateral recovery
rates.
- Most variations of loan valuations are irrelevant as these
illiquid loans are generally held-to-maturity and, ultimately, the
performing loans will revert to par value at maturity.
- Unlike sentiments expressed by some observers, including some
legacy rating agencies, KBRA views the lack of a liquid secondary
market for BDC loans as a net positive in that it forces a
retention of risk and binds the lender to the borrower.
Click here to view the report.
About KBRA
KBRA is a full-service credit rating agency registered in the
U.S., the EU, and the UK, and is designated to provide structured
finance ratings in Canada. KBRA’s ratings can be used by investors
for regulatory capital purposes in multiple jurisdictions.
Doc ID: 1004373
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Kevin Kent, Director +1 301-960-7045 kevin.kent@kbra.com
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teri.seelig@kbra.com
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joe.scott@kbra.com
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