Valuing High-Yield Corporate Credit in the New Regulatory Environment
The 2013 regulatory environment is putting increased pressure on valuations for speculative-grade corporate credit, namely high-yield bonds, leveraged loans and collateralized loan obligations (CLOs). Not only is the final price under greater scrutiny, financial firms will now be required to defend their methodologies on harder-to-price securities.
With transparency having become the new regulatory buzzword, pricing these relatively illiquid instruments poses significant challenges for firms that hold them. Banks and asset managers are coming under more intense pressure from regulators to disclose and defend their valuation methods and the market data that drives them. New regulations that will come into effect over the next 12 months—including ASC 820/IFRS 13, Basel III, Solvency II and AIFMD—require greater transparency in valuing illiquid cash and hard-to-price derivative instruments held in fixed-income portfolios. In addition, firms will be required to implement disciplined processes and controls to ensure that best practices are followed.