Hedge Fund: Portfolio Valuation


A Hedge Fund client held a convertible note in a company that restructured its outstanding debt.  As part of the restructure, the convertible note was exchanged for two separate Term Loans, one a straight debt instrument with a quarterly cash coupon and the other a convertible debt instrument with a restructured conversion price.  The client required a fair value analysis for the two holdings as of its quarter-end reporting period. 


VRC plays an ongoing role in assisting this asset manager with its quarterly marks for financial reporting purposes.  VRC previously analyzed the convertible note and now analyzes the two loans received upon restructuring.  The straight debt loan was valued on a yield analysis considering a risk-adjusted discount rate and the expected future cash flows under the loan.  An issuer call feature was considered in the context of expected cash flows.  Primarily the analysis incorporated the new capital structure and market yields relevant to the seniority, maturity and various rights available to the issuer and holder.  The convertible loan analysis involved a yield analysis, as well as an option analysis.  The option analysis involved a Monte Carlo numerical analysis to incorporate the soft call available to the issuer that acts as a barrier and caps the option value.  The magnitude of the option value indicates how much of a hybrid security the loan is at any point in time and helps determine an appropriate valuation approach.