Valuations are a hot topic in today’s increasingly regulated capital markets. Transparency is a prime concern, as are multi-sourcing of pricing data, timely delivery and the process for handling price challenges. And yet, getting to grips with the intricacies of the issues at hand remains elusive. Until now, that is.
In the first of three webinars in our new webinar library looking at Valuations for High-Yield Corporate Credit (available for free here – just log-in or sign up if you haven’t already), I chat about Leveraged Loans with Michael Pellerito, product manager of Bloomberg’s valuation service (BVAL) and an expert in loan portfolios and pricing models.
Opening the discussion, we talk about the changes and challenges associated with valuations for leveraged loans. Pellerito reviews the repercussions of the 2008 credit crisis, noting an increase in regulatory scrutiny and specific regulations affecting valuations. He explains: “The scrutiny of asset classes has stepped up and reveals the need for independent pricing sources and more sophisticated pricing models. The regulatory environment has been extended to include new fair value accounting standards, such as ASC 20 and IFRS 13 that expand the amount of disclosure required around level two and level three assets.”
Turning to the specifics of valuations, Pellerito notes the need to move on from traditional methodologies that are predominantly manual and include investors looking to dealers for pricing discovery and evaluated pricing firms relying on end-of-day pricing, to automated methods that deliver evaluated pricing services throughout the day.
Automation is also part of the response to price challenges that are costly and time consuming, but a necessary part of the current financial environment. Addressing how to deal with price challenges, Pellerito responds: “In short, the need is to ensure an accurate, defensible and transparent evaluated pricing service. Clients need to be comfortable with prices, methodologies and algorithms to the extent that they have the information and transparency that will head of price challenges.”
Explaining Bloomberg’s approach to tackling the challenges of leveraged loan valuations, Pellerito stresses the focus on transparency. He explains: “The first benefit we deliver is transparency. Our algos, methodology and BVAL screens really show a lot. There is no guessing where our prices come from, we lay all the information out on the table.”
Bloomberg’s evaluated pricing service also meets the challenge of timeliness, gathering data in real time to delver intra-day pricing including seven snapshots through the day. The company also offers broad coverage of the leveraged loans asset class and a pricing model that has been developed to mirror the behaviour of an investor looking for the price of a loan. This involves price discovery, which is handled well by evaluated pricing service providers in liquid markets, but is more difficult to ascertain in semi-illiquid or illiquid markets. Here, Bloomberg takes a relative value approach to pricing, taking into account similar loans in the same industry, with similar ratings and similar characteristics.
We hope you enjoy the webinar series.