KBRA Releases Research – Private Credit: BDC Portfolio Valuations are Rigorous

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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