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Talking Reference Data with Andrew Delaney: Everything You Ever Wanted to Know About Valuations (Part 3)

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Pressing on with our investigation of how high-yield corporate credit asset classes can best be valued and following discussion around leveraged loans and collateralised loan obligations over the past couple of weeks, our focus this week is on high-yield corporate bonds.

In the third of a series of three webinars – published by A-Team and available for free access here– I was joined by Cynthia Sachs, global head of product development for Bloomberg’s valuation service (BVAL), and Varun Pawar, head of corporate product development for BVAL, to discuss the intricacies and idiosyncrasies of high-yield corporate bonds, and discover optimal methods of valuing them.

The webinar series has been complemented by specially commissioned white papers, including a comprehensive review of Valuing High-Yield Corporate Credit in the New Regulatory Environment, available for free here.

And continuing our valuations-related theme, don’t forget to join us tomorrow (Thursday June 6) for a webinar looking at the drive toward more frequent valuations updates. For tomorrow’s webinar, On-Demand Evaluated Pricing, I’ll be joined by expert speakers from Bloomberg, S&P Capital IQ and Interactive Data. It’s free, and should be an interesting and informative session.

Back to the matter at hand – the final webinar in our series on valuation of high-yield corporate bonds. We kick off with some definitions: Pawar describes their issuers as those with ratings below investment grade, typically Triple-B down to C. He says that because they pay a higher coupon rate than investment-grade bonds, they are typically more volatile than investment-grade bonds.

Sachs notes that high-yield corporate bonds, which don’t usually have a collateral component, are often one part of a company’s capital structure and are positioned at the senior unsecured level compared to other less volatile high-yield corporate asset classes such as leveraged loans that include a lien on the asset.

Addressing the question of how high-yield bonds are priced, Pawar explains: “Traditionally, they have been priced using broker runs and end-of-day pricing files. The problem with this is that it is extremely subjective, not transparent and leads to hand pricing of the securities. The financial crisis set the tone for more transparency and regulation and, since then, regulators have focussed on how firms should value their assets. They want greater transparency in how prices are derived so that they can scrutinise the value.”

Considering specific regulations around these securities, Pawar mentions Fair Value Accounting Standards ASC20 and IFRS 13. He says banks are under pressure to demonstrate the quality and credibility of prices, a requirement that aims to strengthen bank capital bases and improve transparency behind valuations.

Once valuations are made, inevitably some are challenged, although Bloomberg seeks to avoid price challenges by providing transparency throughout the valuations process. Pawar explains: “Most vendors send a file of prices to a client. The file doesn’t usually contain background on how the prices have been derived. That means when a client wants to challenge a price they have to go back to the vendor. The challenge has a high degree of latency, it could take a day or two for the vendor to respond to the client and provide more transparency.”

Avoiding such delays, BVAL provides transparency on screen, allowing clients that want to challenge a price to look it up on a Bloomberg terminal and understand how the Bloomberg methodology was used to derive the value of the particular security.

Having ascertained the need for transparency in both valuations and price challenges, we discussed how Bloomberg addresses the pricing of high-yield corporate bonds and the benefits it can deliver to users of the BVAL service.

Pawar says: “As a pricing vendor we have an obligation to clients to give them accurate, defensible and transparent prices. BVAL screens help ensure they have enough information behind the valuation of a security along with additional data that regulators require to help clients classify their securities.”

Detailing how BVAL values securities, Sachs notes an initial approach of using direct observations wherever possible to derive prices, and a model approach as back-up when it is necessary to look at comparatives and peers in the market. She says: “We have a relative value model for high-yield corporate bonds. It is not a black box and instead offers transparency and understanding of the inputs into the model. Clients need this information to respond to regulatory requirements for defensible prices. The models and transparency are clear and helpful in the process clients must undertake with all constituents including regulators and auditors.”

Matching the problems and solutions of valuing high-yield corporate bonds, BVAL provides transparency and relies on underlying data to provide defensible and transparent prices – there is no hand pricing of securities and every data point entered into a valuation can be traced to its origin. The company provides intra-day pricing snapshots and broad coverage of asset classes, with attention to detail manifested in offers such as in-depth documents on the Bloomberg terminal that show clients how models are built and the methodologies used for every asset class the company prices.

You can listen to the valuations webinars presented by A-Team Group and sponsored by Bloomberg on the Reference Data Review website.

Or you can email ron@a-teamgroup.com who can set you up quickly and provide access. If you are already a member, but have forgotten your password (it happens!), you can request it to be sent to you by clicking ‘member login’ on the page.

We hope you enjoy the webinar series.

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