Mandate to evaluate financial instruments in the context of a bond issue by a company in economic difficulty

Mandate description

Mandate to evaluate financial instruments conducted on behalf of a European institutional investor, as part of the analysis of the market value and the probability of recovery of a bond for companies in difficulty.
The issuer, a historical player in the retail trade, was facing a structural erosion of its activity, to a increased pressure on its liquidity, and to a rapid deterioration of its credit rating.

The mission aimed to Determine the fair value of the bond in an illiquid market context and to model the expected potential loss for the investor's portfolio.
The evaluation was part of a prudential approach And of counterparty risk management in accordance with IFRS 9 standards and good institutional asset management practices.

Key issues

The main challenges consisted of:

• Appreciate the potential recovery value in a default or restructuring scenario;
• model the risk-adjusted return curve in a very illiquid secondary market;
• Integrate the probability of defect And the loss rate in case of defect based on prospective scenarios;
• and assess the impact of the downgrade on the accounting and prudential valuation of the obligation.

The analysis mobilized several complementary approaches:

• one discounted cash flow approach adjusted for credit risk, taking into account restructuring or liquidation scenarios;
• one Comparable bond approach, based on market spreads observed for comparable companies in difficulty (high yield/distressed);
• And a fault probability analysis, derived from market data and historical rating matrices.

‍Approach and results

The evaluation made it possible to determine a updated market value interval, reflecting the high uncertainty about the prospects for recovery and the hierarchy of claims in the context of possible legal proceedings.

The work also made it possible to identify the major sensitivity factors, including recovery on tangible assets, secondary market liquidity, and the likely timeline of repayment.

The conclusions were used to document the current book value from the instrument, to strengthen the monitoring of credit exposures and to provide an objective basis for decision support as part of the institutional client's investment policy.