Distressed Bond Valuation Mandate for an Institutional Investor
Independent valuation of a distressed bond conducted to assess market value and recovery prospects under IFRS standards
Mandate Description
The mandate consisted of a financial instrument valuation assignment carried out on behalf of a European institutional investor, as part of the assessment of market value and recovery probability of a bond issued by a company in financial distress.
The issuer, a long-established player in the retail sector, was facing a structural decline in activity, increased pressure on liquidity and a rapid deterioration of its credit rating.
The objective of the assignment was to determine the fair value of the bond in an illiquid market environment and to model the potential loss exposure within the investor’s portfolio.
The valuation formed part of a prudential approach to counterparty risk management, in compliance with IFRS 9 requirements and institutional asset management best practices.
Key Issues
The main challenges of the mandate were to assess potential recovery value in default or restructuring scenarios.
A key objective was to model the risk-adjusted return curve in a highly illiquid secondary market.
The valuation also required integrating default probability and loss given default based on prospective scenarios.
Finally, the assignment aimed to assess the impact of credit rating downgrades on the accounting and prudential valuation of the bond.
Approach and Results
The valuation relied on several complementary analytical approaches.
- A credit risk–adjusted discounted cash flow approach was applied, incorporating restructuring and liquidation scenarios.
- A comparable bond approach was also used, based on market spreads observed for similar distressed or high-yield issuers.
- In addition, a default probability analysis was conducted, derived from market data and historical credit rating transition matrices.
The analysis resulted in an updated market value range reflecting the high level of uncertainty surrounding recovery prospects and the priority of claims in the event of legal proceedings.
The work also identified key sensitivity factors, including recovery on tangible assets, secondary market liquidity and the expected repayment timeline.
The conclusions were used to document the instrument’s carrying value, strengthen the monitoring of credit exposures and provide an objective decision-support framework in line with the institutional investor’s investment policy.
The transactions shown include those completed by, or with the involvement of, Hectelion team members in current or previous professional roles. They are presented for illustrative purposes only and do not imply exclusive responsibility by Hectelion.
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The transactions presented were carried out by, with the contribution of, or with the participation of members of the Hectelion team in the context of functions performed currently or previously.