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Valuation of debt and debt like securities

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It is critical for fund portfolio managers and analysts as well as financial executives of the investee companies to understand when valuation of debt or debt-like securities is required and how the …

It is critical for fund portfolio managers and analysts as well as financial executives of the investee companies to understand when valuation of debt or debt-like securities is required and how the subject debt's economics impact the "synthetic" credit rating, estimation of required yield, and valuation methodologies. In addition, proper identification of features of the debt instrument(s) that may require additional accounting consideration is essential.

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  • Debt issued by companiesA promise (or contract) to pay back borrowed money, in most cases, plus interest Fixed income instrument, i.e., an instrument that pays a regular or fixed return (versus a variable return instrument like stocks)
  • Sometimes debt may have an external guarantee issued by a parent company, or bank stand by letter of credit. (external enhancements)
  • Explain call premium
  • Explain negative convexity
  • OPM can be used too
  • Make sure GAAP guidance will be covered. Discount rate is a topic in itself. Lots of guidance out there. Next Section.
  • Mention comparability factors.
  • Mention that the issues surrounding valuation of the convertible debt is outside of the scope of this presentation
  • Mention why we exclude finance/utilities
  • Issues fixed vs. floating.Best article of debt. Articles out of Worton back in the 70th. Professor was thoughtful fixed vs. floating. Argument for firm value: CF positively correlated with interest rates. Jeremy XXX.
  • Transcript

    • 1. CPE Credit is not available for viewing archived programs. Please visit http://www.grantthornton.com/events for upcoming programs. Valuation of Debt and Debt-like Securities Original Broadcast Date: September 2013 © Grant Thornton LLP. All rights reserved.
    • 2. Today's Presenters David Dufendach John Ferro Partner Valuation Services Seattle Managing Partner Valuation Services New York Oksana Westerbeke Managing Director Valuation Services Boston © Grant Thornton LLP. All rights reserved. 2
    • 3. Valuation of Debt and Debt-like Securities Learning objectives / Agenda • Identify unit of account and its impact on the valuation • Recognize different types of debt (straight debt, callable debt, convertible debt, debt-like preferred stock, etc.) • Recognize the economics of each debt instrument and the value-driving factors • Identify features of the debt instrument(s) that may require additional accounting and valuation considerations • Identify methodologies to value various types of debt and embedded derivatives • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt © Grant Thornton LLP. All rights reserved. 3 3
    • 4. Valuation of Debt and Debt-like Securities Learning objectives / Agenda (continued) • List the pros and cons of each synthetic credit rating methodology • Identify how to factor in debt's seniority, presence of collateral and thirdparty guarantee into the yield • Recognize how to develop the market yield for the debt © Grant Thornton LLP. All rights reserved. 7 4
    • 5. Valuation of Debt and Debt-like Securities Learning objectives / Agenda • Identify unit of account and its impact on the valuation • Recognize different types of debt (straight debt, callable debt, convertible debt, debt-like preferred stock, etc.) • Recognize the economics of each debt instrument and the value-driving factors • Identify features of the debt instrument(s) that may require additional accounting considerations • Identify methodologies applicable to value various types of debt and embedded derivatives • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt © Grant Thornton LLP. All rights reserved. 5 5
    • 6. Unit of account • The unit of account defines what is being measured for financial reporting purposes. It is an accounting concept that determines the level at which an asset or liability is aggregated or disaggregated for purposes of applying ASC 820 or other ASC topic. • The unit of account may be a standalone asset or liability, a group of assets, a group of liabilities or a group of assets and liabilities. © Grant Thornton LLP. All rights reserved. 6
    • 7. Unit of account and WACC • Controlling interest – For a controlling interest, market participant assumptions will include considerations of how an acquiring company can affect the capital structure and the required rates of return. – Therefore, in estimating the weighted-average cost of capital ("WACC"), one should use market participant's assumptions about the capital structure and the cost of debt. © Grant Thornton LLP. All rights reserved. 7
    • 8. Unit of account and WACC (continued) • Minority interest – For a minority interest, considerations about the optimal capital structure are outside of the minority holders' control and their assumptions about capital structure are based on considerations of the company’s current situation (existing capital structure). – Therefore, in estimating the WACC, one should use the subject company's capital structure and the cost of debt. – However, for highly leveraged companies, market participants' capital structure and cost of debt would still be appropriate, as the expectation is that control shareholders will reduce the leverage to a normalized capital structure over time. © Grant Thornton LLP. All rights reserved. 8
    • 9. Unit of account and debt • Controlling interest – Since the definition of fair value under ASC 820 contemplates a transaction at the measurement date and, in most cases, the transaction in a controlling interest would necessarily require a repayment of all debt, the equity value is the proceeds remaining after settling the claims of debt holders. – In this case, the principal market is the merger and acquisition market (considering the holder’s economic best interest). Therefore, one should subtract the payoff value of debt (including any change of control penalties) from the enterprise value in order to estimate the fair value of this controlling equity interest. © Grant Thornton LLP. All rights reserved. 9
    • 10. Unit of account and debt (continued) • Minority interest – If the interest being valued is a minority equity interest that does not have the ability to force a transaction for the entire business, the principal market is the sale of that minority interest in a private transaction. – In this case, a market participant would not be able to restructure or otherwise extinguish the entity’s debt and would be subject to the continuing debt service requirements of the outstanding debt. – To estimate fair value of a minority interest, current guidance indicates that one should subtract fair value of debt instead of book value. To the extent that the interest rate for the debt is different from the current market yield, the fair value of the debt will be different from its book value. © Grant Thornton LLP. All rights reserved. 10
    • 11. Treatment of debt based on fund holdings Equity securities Debt (non-convertible) © Grant Thornton LLP. All rights reserved. Reporting entity Reporting entity does controls equity not control equity Equity is estimated on a Equity is estimated on a control basis using the minority basis using fair payoff amount of debt value of debt (including any prepayment penalties) Payoff amount (including any prepayment penalties) 11 Fair value
    • 12. Valuation of Debt and Debt-like Securities Learning objectives / Agenda • Identify unit of account and its impact on the valuation • Recognize different types of debt (straight debt, callable debt, convertible debt, debt-like preferred stock, etc.) • Recognize the economics of each debt instrument and the value-driving factors • Identify features of the debt instrument(s) that may require additional accounting considerations • Identify methodologies applicable to value various types of debt and embedded derivatives • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt © Grant Thornton LLP. All rights reserved. 12 12
    • 13. Debt basics Terminology • Indenture – contractual agreement stating terms of the debt • Issuer – entity that issues a bond certificate, borrows money, pays interest, and repays principal. Issuer = borrower = subject company • Holder – entity that holds a bond certificate, lends the money and receives interest and repayment of principal. Holder = lender = investors • Principal – amount borrowed (also “par value” or “face value”) • Yield or coupon – interest that the issuer must pay • Maturity – date when principal must be fully repaid • Duration – a measure of the average life of a bond © Grant Thornton LLP. All rights reserved. 13
    • 14. Debt basics Common characteristics of debt • Common characteristics or features – Publicly traded vs. private – Secured vs. unsecured – Senior vs. subordinated – Fixed rate vs. variable rate – Amortizing vs. non-amortizing – Cash paying vs. paid-in-kind (PIK) – Convertible vs. non-convertible – No enhancement vs. external third-party enhancement (guarantee) © Grant Thornton LLP. All rights reserved. 14
    • 15. Debt basics Common types of debt • Most common types of debt (or debt-like) instruments – Plain vanilla (straight) debt – Debt with early redemption options (puts and calls) – Convertible debt – Redeemable preferred – Debt in default – "Fresh start" debt © Grant Thornton LLP. All rights reserved. 15
    • 16. Types of debt and debt-like instruments Plain vanilla (straight) debt • Debt that has a constant stated coupon and maturity • Does not have early redemption options by either the issuer or the holder (calls or puts) • Is not convertible • Does not have any other contingencies • Can be amortizable or PIK © Grant Thornton LLP. All rights reserved. 16
    • 17. Types of debt and debt-like instruments Debt with embedded options • The issuer (holder) has the option to redeem debt at a predetermined (contractually defined) value plus any accrued interest at predetermined (contractually defined) date(s) • Party that holds the early redemption option is motivated to maximize the value of the asset held (or minimize the liability) • Callable or putable debt has a variable rather than a contractual life: the value of the debt option is driven by the shape of the yield curve, yield volatility, the option nature of the call/put feature, and the "moneyness" of the call/put. • Some debt may have make-whole provisions (similar to call options but much higher penalties) • Embedded options make valuation of callable/putable debt challenging © Grant Thornton LLP. All rights reserved. 17
    • 18. Types of debt and debt-like instruments Callable debt • Call is the early redemption (or prepayment) option held by the company • The company has the option to call the security (or prepay the debt) • Company is motivated to minimize its liability and will call the security when the fair value of debt is higher than the call value • Company usually redeems debt prior to maturity if its cost of borrowing declined relative to the issuance date © Grant Thornton LLP. All rights reserved. 18
    • 19. Types of debt and debt-like instruments Callable debt (continued) • A call option is an option held by the issuer (company). Therefore, to compensate investors for the risk of the company redeeming the debt, callable debt will have a higher coupon relative to comparable non-callable debt and/or lower value • The call feature is generally effective over long periods of time (often throughout the life of the debt), but may have different call premiums throughout the life of the debt • The call premium (or prepayment penalty) is also a consideration for the issuer when deciding whether to exercise the call option © Grant Thornton LLP. All rights reserved. 19
    • 20. Types of debt and debt-like instruments Callable debt (continued) • Example 1: – Company ABC (the Company) issued a 7-year 6.0%-coupon note on 12 December 2012 to a third party. The note is redeemable by the Company after the first anniversary at 100% of par. • Example 2: – Company ABC (the Company) issued a 5-year 8.0%-coupon note on 10 October 2012 to a third party. The note is redeemable by the Company as follows: • • • • 103% of par anytime after the first anniversary 102% of par anytime after the second anniversary 101% of par anytime after the third anniversary 100% of par anytime after the fourth anniversary © Grant Thornton LLP. All rights reserved. 20
    • 21. Types of debt and debt-like instruments Callable debt (continued) • If the market yield for the debt decreased either due to decreased credit risk of the company or the overall decline in the market spreads, then the company has incentive to call (prepay) the current high coupon debt and refinance at a lower rate • The call option effectively puts a cap on the fair value of the debt • This creates a negative convexity in the callable debt price – When yields are high and the call option is out-of-the-money, the callable debt will behave very much like the straight debt – When yields are low and the call option is in-the-money, the call option will limit the debt value to the call value © Grant Thornton LLP. All rights reserved. 21
    • 22. Types of debt and debt-like instruments Callable bond value as a function of market yields © Grant Thornton LLP. All rights reserved. 22
    • 23. Types of debt and debt-like instruments Putable debt • Put is the early redemption option held by the security holder (the lender) • The holder of the security (the lender) has the option to require the company to repay the debt at a certain predetermined price • The holder is motivated to maximize the value of its asset (debt) and will put the security when the fair value is lower than the put value • The holder usually redeems debt prior to maturity if the company's cost of borrowing has increased relative to the issuance date © Grant Thornton LLP. All rights reserved. 23
    • 24. Types of debt and debt-like instruments Putable debt example • Example 1: – Company ABC (the Company) issued a 6-year 5.0%-coupon note on 30 September 2012 to a third party. – The note is redeemable by the holder at 100% of par on 30 September 2014 and 30 September 2016. © Grant Thornton LLP. All rights reserved. 24
    • 25. Types of debt and debt-like instruments Putable debt (continued) • If the market yield for the debt increased, then the holders of the debt have incentive to put (require the company to repay) the current low coupon debt that no longer reflects the investment risk and refinance at a higher rate • The put option effectively puts a floor on the fair value • A put option is an option held by the holder of the debt (investor or lender). The lower risk of a putable debt is incorporated by way of a lower coupon (relative to comparable non-putable instruments) and/or higher value • The put feature is generally effective on certain dates, for example, on the last date of each fiscal years 3, 4, and 5. • It is common for the debt to have no put feature © Grant Thornton LLP. All rights reserved. 25
    • 26. Types of debt and debt-like instruments Convertible debt • Hybrid instrument that contains features of both debt and equity • The conversion provision gives the debt holder the option to convert its principal into a predetermined number of common shares at a predetermined price – When the conversion option is deep in the money, the instrument behaves like equity – When the conversion option is deep out of the money, the instrument behaves like debt – When the conversion option is near the money, the instrument exhibits features of both debt and equity • May include early redemption features and/or other contingencies © Grant Thornton LLP. All rights reserved. 26
    • 27. Types of debt and debt-like instruments Convertible debt (continued) • Always pays a coupon that is lower than an otherwise equivalent instrument without the conversion feature • Valuation of a convertible debt requires sophisticated binomial lattice models • In certain cases, when convertible debt has no early redemption options or other contingencies, the value of a convertible debt can be approximated using a DCF method for contractual debt payments and a Black-Scholes call option model to value the conversion option © Grant Thornton LLP. All rights reserved. 27
    • 28. Types of debt and debt-like instruments Mandatorily redeemable preferred stock • Preferred equity that pays dividends but has no conversion feature or participation rights with equity • Similar to straight debt from a valuation perspective – Redeemable preferred dividends ≈ Debt coupon • Key differences from debt – – – – Preferred stock has no predetermined maturity date (perpetual) Has a mandatory redemption date Lower in capital structure Non-payment of dividends is usually not considered a default by the issuer – Different accounting treatment © Grant Thornton LLP. All rights reserved. 28
    • 29. Types of debt and debt-like instruments Debt in default • Debt in default – Non-payment of interest and/or principal when due – Broken covenants • Typically valued based on the following methodologies – Liquidation analysis • Valuation of individual assets and/or total enterprise value • Given priority to claims that rank senior to the subject debt – Going concern (restructuring) analysis • Based on the company’s restructuring plan and ability to repay debt – Expected value analysis • Based on liquidation and negotiation scenarios © Grant Thornton LLP. All rights reserved. 29
    • 30. Types of debt and debt-like instruments "Fresh start" debt • Debt issued by companies emerging from bankruptcy • Typical characteristics – Secured – Medium term – High cash coupon • Valuation challenges – – – – Difficult to assess credit rating Past is not representative of the future Information about the future is often withheld and/or unavailable Difficult to find comparable fresh start debt © Grant Thornton LLP. All rights reserved. 30
    • 31. Valuation of Debt and Debt-like Securities Learning objectives / Agenda • Identify unit of account and its impact on the valuation • Recognize different types of debt (straight debt, callable debt, convertible debt, debt-like preferred stock, etc.) • Recognize the economics of each debt instrument and the valuedriving factors • Identify features of the debt instrument(s) that may require additional accounting considerations • Identify methodologies applicable to value various types of debt and embedded derivatives • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt © Grant Thornton LLP. All rights reserved. 31 31
    • 32. Key drivers of debt value Instrumentspecific factors Companyspecific factors Market factors Debt value © Grant Thornton LLP. All rights reserved. 32
    • 33. Key drivers of debt value Company-specific factors • Credit risk (also “default risk” or “nonperformance risk”) • Risk of loss arising from borrower’s inability to fulfill contractual obligations of the debt Company agreement specific factors • Uncertainty surrounding underlying cash flows of debt instruments • Credit loss manifests itself through… – – – – Unpaid principal and/or interest Decreased cash flow Delayed timing of cash flows Increased costs (e.g., collection costs, legal costs) © Grant Thornton LLP. All rights reserved. 33 Instrument specific factors Market factors Debt value
    • 34. Key drivers of debt value Company-specific factors that affect credit risk • Quantitative considerations – – – – – – Size Leverage Interest coverage Solvency Profitability Operating performance Instrument specific factors Company specific factors Debt value • Qualitative factors – Management expertise – Industry dynamics and competition – Overall operating and financial performance © Grant Thornton LLP. All rights reserved. Market factors 34
    • 35. Key drivers of debt value Company-specific factors that affect country credit risk • Two-step process for foreign debt 1. Consider credit risk of domicile country 2. Consider credit risk of issuing company Instrument specific factors Company specific factors Market factors Debt value © Grant Thornton LLP. All rights reserved. 35
    • 36. Key drivers of debt value Instrument-specific factors • • • • • Coupon Seniority Collateral Maturity/duration Structure (e.g., embedded options, paid-in-kind interest) • Covenants • Amortization schedule • Credit enhancements © Grant Thornton LLP. All rights reserved. 36 Instrument specific factors Company specific factors Market factors Debt value
    • 37. Key drivers of debt value Market factors • Market and other external factors • Benchmark rates (e.g. U.S. Treasurys) Company specific factors • Market liquidity • Market shocks (e.g., financial crisis) • General economic environment • Regulatory environment © Grant Thornton LLP. All rights reserved. Instrument specific factors 37 Market factors Debt value
    • 38. Key drivers of debt value Impact of certain factors on debt value Factor group Company-specific Instrument-specific Market factor Factor Credit Collateral Seniority Maturity / duration Coupon Covenants Embedded options Principal amortization Benchmark rates Market yields Liquidity © Grant Thornton LLP. All rights reserved. Lower value Poor credit Unsecured Subordinated Longer Paid-in-kind No covenants Callable by issuer Non-amortizing Increasing Increasing Illiquid 38 Higher value Excellent credit Secured Senior Shorter Cash Covenant-heavy Putable by holder Amortizing Decreasing Decreasing Very liquid
    • 39. Valuation of Debt and Debt-like Securities Learning objectives / Agenda • Identify unit of account and its impact on the valuation • Recognize different types of debt (straight debt, callable debt, convertible debt, debt-like preferred stock, etc.) • Recognize the economics of each debt instrument and the value-driving factors • Identify features of the debt instrument(s) that may require additional accounting considerations • Identify methodologies applicable to value various types of debt and embedded derivatives • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt © Grant Thornton LLP. All rights reserved. 39 39
    • 40. Embedded options Things to watch out for • Conversion options if: (i) upon conversion, holders can receive cash or a combination of cash and shares or (ii) the number of shares authorized is not sufficient to meet the company's obligations under the conversion option • Redemption option held by the holders if it is contingent upon certain events (other than a change of control event), such as loss of major customer, etc. • Redemption option held by the company if it is linked to the next round of equity financing. For example, company can redeem a portion or 100% of the notes with the proceeds from a qualified round. © Grant Thornton LLP. All rights reserved. 40
    • 41. Embedded options Things to watch out for (continued) • Contingent interest (interest increase or interest resets if certain conditions are met) • Beneficial conversion features if the note's conversion option is believed to be in-the-money on the issuance date • Beneficial conversion features upon an IPO if debt converts at a discount to the IPO price • Default provisions, such as: (i) redemption option held by noteholders to put the debt upon a default event, (ii) default penalties, or (iii) default (higher) interest rate © Grant Thornton LLP. All rights reserved. 41
    • 42. Valuation of Debt and Debt-like Securities Learning objectives / Agenda • Identify unit of account and its impact on the valuation • Recognize different types of debt (straight debt, callable debt, convertible debt, debt-like preferred stock, etc.) • Recognize the economics of each debt instrument and the value-driving factors • Identify features of the debt instrument(s) that may require additional accounting considerations • Identify methodologies applicable to value various types of debt and embedded derivatives • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt © Grant Thornton LLP. All rights reserved. 42 42
    • 43. Valuation approaches The Yield Method • Discounted cash flow (DCF) analysis that discounts contractual cash flows (principal and interest payments) using a risk-adjusted discount rate (market yield) • All risk factors associated with the debt are captured in the discount rate • Most commonly used methodology to value debt • Easy to apply • Most applicable when… – Valuing performing debt (covenants are not broken, debt is not in default) – Debt has no early redemption options or other contingencies • Key steps – Calculate and model contractual interest and principal payments – Estimate a discount rate indicative of a market yield – Discount the adjusted cash flows to the measurement date © Grant Thornton LLP. All rights reserved. 43
    • 44. Valuation approaches The Yield Method (continued) • Potential valuation challenges – Estimating appropriate discount rates when market data may be unavailable (e.g., CC rated debt or foreign debt) – Adjusting yields/spreads when there are no closely comparable debt issuances with observable yields (e.g., different seniority or collateral provisions) – Considerations for a floating or PIK nature of the coupon © Grant Thornton LLP. All rights reserved. 44
    • 45. Valuation approaches The Yield Method (continued) Significant assumptions Market yield analysis Valuation Date First coupon date Maturity date Term (years) Notional outstanding Coupon type Coupon margin Months between reset dates Period 1 2 3 4 5 6 7 8 Payment date 6/30/2013 12/30/2013 6/30/2014 12/30/2014 6/30/2015 12/30/2015 6/30/2016 10/21/2016 Beginning principal balance $70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 © Grant Thornton LLP. All rights reserved. 3/31/2013 6/30/2013 10/21/2016 3.56 70,000 Fixed 8.00% 6.00 Principal repayments 5,000 5,000 5,000 5,000 5,000 5,000 5,000 35,000 Credit rating Credit rating source Credit rating date Spread CCC Ordered Logit Model 4/16/2013 856 Value using the Yield Method Value as % of par Ending principal balance Interest payment $65,000 60,000 55,000 50,000 45,000 40,000 35,000 0 1,416 2,643 2,427 2,237 2,022 1,830 1,627 879 45 68,925 98.5% Total cash flow (principal plus interest) Discount rate 6,416 7,643 7,427 7,237 7,022 6,830 6,627 35,879 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Discount Present value factor of cash flows 0.98 0.94 0.90 0.86 0.82 0.79 0.76 0.74 6,279 7,165 6,668 6,224 5,785 5,389 5,008 26,406
    • 46. Valuation approaches Binomial lattice model • When debt has embedded conversion, call or put features, the debt has a variable rather than a contractual life as it can be converted/called/put, and, therefore, terminate before the maturity date is reached • The value of the debt with embedded conversion option is driven by the expectations about the distribution of future stock prices, which is a function of the stock volatility, and "moneyness" of the conversion option • The value of the debt with embedded call or put option is driven by the shape of the yield curve • The appropriate methodology to value callable/putable debt is a binomial lattice model © Grant Thornton LLP. All rights reserved. 46
    • 47. Valuation approaches Binomial lattice model (continued) • Most applicable when… – Valuing debt with the embedded call or put option • Potential valuation challenges – Requires a sophisticated valuation model that explicitly models all embedded features of the debt – Generally, difficult to implement in-house; requires valuation specialist © Grant Thornton LLP. All rights reserved. 47
    • 48. Valuation approaches Black-Derman-Toy (BDT) model • As the value of the debt with embedded call or put option is driven by the shape of the yield curve, in the valuation of callable or putable debt, one should develop the binomial tree of future interest rates. • There are several methodologies to develop the interest rate tree. One of the most commonly used methodologies is Black-DermanToy ("BDT") model • BDT model assumes that interest rates follow a binomial process and uses current observed yields and yield volatility to estimate future outcomes for the yields © Grant Thornton LLP. All rights reserved. 48
    • 49. Valuation approaches Black-Derman-Toy (BDT) model (continued) Example: ABC Company issued debt to third party at 100% of par on 12/31/2012. The debt has a 7% coupon paid annually and maturity of 5 years. The debt is prepayable (callable by the company) at 100% of par at anytime. • If interest rates decline, the value of the debt will increase as debt is paying a higher coupon than a newly issued callable debt would (at lower market yield) • The company will choose to minimize its liability (not let the value increase above par) and repay the debt to refinance at lower interest rates © Grant Thornton LLP. All rights reserved. 49
    • 50. Valuation approaches Black-Derman-Toy (BDT) model (continued) • First 10 nodes of a sample binomial interest rate tree 0 Date 12/31/2012 Time (years): 0.00 Volatility 0.00 0.01 0.02 0.04 0.05 0.06 0.07 0.08 0.10 0.11 0.12 1 1/4/2013 0.01 2 3 4 5 6 7 1/8/2013 1/13/2013 1/17/2013 1/21/2013 1/26/2013 1/30/2013 0.02 0.04 0.05 0.06 0.07 0.08 8 2/4/2013 0.10 9 10 2/8/2013 2/12/2013 0.11 0.12 31.50% 31.50% 31.50% 31.50% 31.50% 31.50% 31.50% 31.50% 31.50% 31.50% 31.50% 5.12% 4.95% 5.30% 4.78% 5.12% 5.48% 4.61% 4.94% 5.29% 5.67% 4.45% 4.77% 5.11% 5.48% 5.87% 4.30% 4.61% 4.94% 5.29% 5.67% 6.07% 4.15% 4.45% 4.77% 5.11% 5.47% 5.86% 6.28% 4.01% 4.30% 4.60% 4.93% 5.28% 5.66% 6.06% 6.50% 3.87% 4.15% 4.44% 4.76% 5.10% 5.47% 5.86% 6.27% 6.72% 3.74% 4.00% 4.29% 4.60% 4.93% 5.28% 5.65% 6.06% 6.49% 6.95% 3.61% 3.87% 4.14% 4.44% 4.76% 5.10% 5.46% 5.85% 6.27% 6.72% 7.19% © Grant Thornton LLP. All rights reserved. 50
    • 51. Valuation approaches Black-Derman-Toy (BDT) model (continued) • Call feature caps the value of the debt on the high nodes of the binomial tree, reducing the value of the debt Period 0 1 2 3 4 5 6 7 8 9 10 Date 12/31/2012 1/4/2013 1/8/2013 1/13/2013 1/17/2013 1/21/2013 1/26/2013 1/30/2013 2/4/2013 2/8/2013 2/12/2013 Time 0.00 0.01 0.02 0.04 0.05 0.06 0.07 0.08 0.10 0.11 0.12 Accrued interest 0.00 0.08 0.15 0.25 0.33 0.40 0.50 0.58 0.67 0.75 0.82 Callable as % of par 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 0.00 0.01 0.02 0.04 0.05 0.06 0.07 0.08 0.10 0.11 0.12 100.00 100.08 100.08 © Grant Thornton LLP. All rights reserved. 100.15 100.15 100.13 100.25 100.25 100.25 100.14 100.33 100.33 100.33 100.29 100.11 51 100.40 100.40 100.40 100.40 100.31 100.05 100.50 100.50 100.50 100.50 100.47 100.29 99.96 100.58 100.58 100.58 100.58 100.58 100.49 100.23 99.83 100.67 100.67 100.67 100.67 100.67 100.64 100.47 100.14 99.67 100.75 100.75 100.75 100.75 100.75 100.75 100.66 100.41 100.01 99.48 100.82 100.82 100.82 100.82 100.82 100.82 100.81 100.64 100.32 99.86 99.26
    • 52. Valuation approaches Black-Derman-Toy (BDT) model (continued) • Value for identical bond without the call feature Period 0 1 2 3 4 5 6 7 8 9 10 Date 12/31/2012 1/4/2013 1/8/2013 1/13/2013 1/17/2013 1/21/2013 1/26/2013 1/30/2013 2/4/2013 2/8/2013 2/12/2013 Time 0.00 0.01 0.02 0.04 0.05 0.06 0.07 0.08 0.10 0.11 0.12 Accrued interest 0.00 0.08 0.15 0.25 0.33 0.40 0.50 0.58 0.67 0.75 0.82 Callable as % of par 0.00 0.01 0.02 0.04 0.05 0.06 0.07 0.08 0.10 0.11 0.12 101.55 101.83 101.39 © Grant Thornton LLP. All rights reserved. 102.10 101.69 101.23 102.35 101.96 101.53 101.05 102.58 102.22 101.82 101.37 100.86 52 102.80 102.47 102.10 101.67 101.20 100.65 103.01 102.70 102.35 101.96 101.51 101.01 100.44 103.21 102.91 102.59 102.23 101.81 101.35 100.81 100.21 103.39 103.12 102.81 102.48 102.09 101.66 101.17 100.61 99.97 103.57 103.31 103.03 102.71 102.35 101.95 101.50 100.98 100.38 99.71 103.73 103.49 103.23 102.93 102.60 102.23 101.80 101.32 100.77 100.15 99.44
    • 53. Valuation approaches Recovery analysis • • • • DCF analysis of cash flows estimated based on the net recoverable proceeds resulting from the liquidation of the underlying asset(s) There might be one or more scenarios Also called Net Realizable Value method Most applicable when… – Valuing non-performing or defaulted debt – Cash flows are no longer expected in accordance with contractual terms • Key steps – Estimate gross proceeds from the underlying asset(s) using an estimated recovery assumption (based on comparable market and/or historical data) or from a direct appraisal of the underlying asset – Adjust gross recovery proceeds based on servicing, legal, collection, and other costs incurred in liquidating the underlying asset(s) – Estimate a discount rate to apply to the net recovery cash flows – Discount the net proceeds over an appropriate recovery period © Grant Thornton LLP. All rights reserved. 53
    • 54. Valuation approaches Recovery analysis (continued) • Potential valuation challenges – Estimating a gross recovery rate or the value of the underlying asset(s) – Identifying and quantifying additional costs/expenses required to calculate net proceeds – Estimating the recovery period – Estimating a risk-adjusted discount rate that appropriately captures the risk inherent in the non-performing debt © Grant Thornton LLP. All rights reserved. 54
    • 55. Valuation approaches Summary Valuation approach The Yield Method Lattice model with a price tree Types of debt Performing debt “Straight” debt Mandatorily redeemable preferred stock Convertible debt Lattice model with an interest rate tree (e.g. BDT Model) Debt with embedded call/put options Recovery analysis Non-performing / distressed debt Debt in default © Grant Thornton LLP. All rights reserved. 55
    • 56. Valuation of Debt and Debt-like Securities Learning objectives / Agenda (continued) • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt • List the pros and cons of each synthetic credit rating methodology • Identify how to factor in debt's seniority, presence of collateral and thirdparty guarantee into the yield • Recognize how to develop the market yield for the debt © Grant Thornton LLP. All rights reserved. 7 56
    • 57. Credit rating • One of the most critical steps in estimating the fair value of debt • Drives the selection of the comparable debt universe, applicable spread and/or recovery rate • When the actual credit rating is not available for the subject company and/or subject debt, one can estimate a "synthetic" credit rating • Steps prior to proceeding: – Make sure the subject debt is not traded • Check Bloomberg TRACE data • Cannot rely on BVAL or BGN Bloomberg rating system – Make sure the subject company does not have other traded debt from which the market yield for the subject debt can be derived – Make sure the company does not have a corporate or debt rating © Grant Thornton LLP. All rights reserved. 57
    • 58. Credit rating Quantitative methodologies • Linear regression analysis on one or more key financial metrics • Damodaran rating system • Moody’s credit rating tool for private companies • Ordered Logit Model (distribution of ratings) NOTE: All the above methodologies estimate the subject company's credit rating, not the specific debt credit rating © Grant Thornton LLP. All rights reserved. 58
    • 59. Credit rating Quantitative methodologies (continued) • Gather ratings and financial data for a universe of rated companies – Larger universe (all US rated companies, excluding certain industries, such as financial services and utilities) – Industry-specific (smaller sample size that captures a scale of available ratings) • Assess the relationship between the financial metrics for the universe of companies and their respective credit ratings • Estimate a corporate credit rating for the subject company based on the estimated relationship and the subject company’s financial metrics © Grant Thornton LLP. All rights reserved. 59
    • 60. Regression analysis Summary • Credit rating is regressed against one or more financial metrics • Metrics typically considered: – – – – Size (log) of total assets (formula = LN(Total Assets)) Debt to total asset ratio Debt to market cap Interest coverage ratio (interest expense excluding interest income divided by EBIT) – Industry-specific factors (financial services) • Each relationship between the financial metric and the rating is assessed individually. Results are then compared and one rating or a range of ratings is selected. © Grant Thornton LLP. All rights reserved. 60
    • 61. Regression analysis Pros and cons Pros: • Easy to understand • Easy to use • Can see the magnitude of rating's dependency on a certain metric (R square) Cons: • Statistical tool is often required to perform a multi-variable regression analysis • Single variable regressions often result in vastly different credit ratings (A to CCC) • Hard to narrow down on a rating • Does not show a distribution of rating (gives you only one rating) © Grant Thornton LLP. All rights reserved. 61
    • 62. Damodaran credit rating methodology Summary • Assesses credit rating based on interest coverage ratio • Damodaran developed a matrix relating company's interest coverage ratio to its credit rating for three universes: – Large manufacturers – Financial services – Small and risky companies • Latest spreadsheet is available for download at http://people.stern.nyu.edu/adamodar/ © Grant Thornton LLP. All rights reserved. 62
    • 63. Damodaran credit rating methodology Example Inputs for synthetic rating estimation Please read the special cases worksheet (see below) before you use this spreadsheet. Before you use this spreadsheet, make sure that the iteration box (under calculation options in excel) is checked. Enter the type of firm = 2 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial service <$5 billion Small: firm) Do you have any operating lease or rental commitments? Yes Enter current Earnings before interest and taxes (EBIT) = 50 (Add back only long term interest expense for financial firms) Enter current interest expenses = 8 (Use only long term interest expense for financial firms) Enter current long term government bond rate = 5.10% Output Interest coverage ratio = 2.91 Estimated Bond Rating = B+ Note: If you get REF! All over the place, set the operating lease commitment question in cell F5 Estimated Default Spread = 5.50% to No, and then reset it to Yes. It should work . Estimated Cost of Debt = 10.60% If you want to update the spreads listed below, please visit http://www.bondsonline.com For large manufacturing firms For financial service firms (default spreads are slighty different) If interest coverage ratio is If long term interest coverage ratio is > ≤ to Rating is Spread is greater than ≤ to Rating is Spread is -100000 0.199999 D 12.00% -100000 0.049999 D 12.00% 0.2 0.649999 C 10.50% 0.05 0.099999 C 10.50% 0.65 0.799999 CC 9.50% 0.1 0.199999 CC 9.50% 0.8 1.249999 CCC 8.75% 0.2 0.299999 CCC 8.75% 1.25 1.499999 B7.25% 0.3 0.399999 B7.25% 1.5 1.749999 B 6.50% 0.4 0.499999 B 6.50% 1.75 1.999999 B+ 5.50% 0.5 0.599999 B+ 5.50% 2 2.2499999 BB 4.00% 0.6 0.749999 BB 4.00% 2.25 2.49999 BB+ 3.00% 0.75 0.899999 BB+ 3.00% 2.5 2.999999 BBB 2.00% 0.9 1.199999 BBB 2.00% 3 4.249999 A1.30% 1.2 1.49999 A1.30% 4.25 5.499999 A 1.00% 1.5 1.99999 A 1.00% 5.5 6.499999 A+ 0.85% 2 2.49999 A+ 0.85% 6.5 8.499999 AA 0.70% 2.5 2.99999 AA 0.70% 8.50 100000 AAA 0.40% 3 100000 AAA 0.40% © Grant Thornton LLP. All rights reserved. 63
    • 64. Damodaran credit rating methodology Example (continued) For smaller and riskier firms If interest coverage ratio is greater than ≤ to Rating is -100000 0.499999 D 0.5 0.799999 C 0.8 1.249999 CC 1.25 1.499999 CCC 1.5 1.999999 B2 2.499999 B 2.5 2.999999 B+ 3 3.499999 BB 3.5 3.9999999 BB+ 4 4.499999 BBB 4.5 5.999999 A6 7.499999 A 7.5 9.499999 A+ 9.5 12.499999 AA 12.5 100000 AAA © Grant Thornton LLP. All rights reserved. 64 Spread is 12.00% 10.50% 9.50% 8.75% 7.25% 6.50% 5.50% 4.00% 3.00% 2.00% 1.30% 1.00% 0.85% 0.70% 0.40%
    • 65. Damodaran credit rating methodology Pros and cons Pros: • Easily available • Free • Easy to use (gives you rating and yield) Cons: • Based on the market that is dominated by larger industry players • Implies that interest coverage ratio has the largest impact on the credit rating • Only current matrix is available (no historical data) • Historically, was indifferent to the company size: – Underestimated rating for larger companies – Overestimated rating for smaller companies – Now uses a separate table for "smaller, riskier" companies © Grant Thornton LLP. All rights reserved. 65
    • 66. Moody's credit rating tool Overview Online tool to assess the credit rating based on various company metrics Pros: • Developed by Moody's • Considers various factors Cons: • Not very widely used • Requires pay for subscription • Needs to be calibrated to adjust the synthetic credit rating based on the error margin observed (additional work) • Based on past cases, it was, on average, 3 notches (a full rating) off © Grant Thornton LLP. All rights reserved. 66
    • 67. Ordered Logit Model Overview • Ordered Logit ("oLogit") model* – Five independent ("X") variables (factors): Factor Metric Impact on credit rating Size Total assets Significant Leverage Debt / Total assets Significant Solvency EBIT / Debt Marginal Operating performance Return on assets Minimal Operating margin EBIT/Revenue Minimal * Based on paper “A Methodology for Estimating Credit Ratings and the Cost of Debt for Business Units and Privately Held Companies,” Minardi, Sanvicente, Artes. © Grant Thornton LLP. All rights reserved. 67
    • 68. Ordered Logit Model Numeric variables • Dependent ("Y") variable is a categorical variable that is ordered • Model output is on an ordinal scale corresponding to the different S&P credit ratings. S&P rating AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ © Grant Thornton LLP. All rights reserved. Numeric rating 1 2 3 4 5 6 7 8 9 10 11 S&P rating BB BBB+ B BCCC+ CCC CCCCC C D 68 Numeric rating 12 13 14 15 16 17 18 19 20 21 22
    • 69. Ordered Logit Model Mechanics • The Ordered Logit model establishes a relationship between credit ratings and financial data of guideline companies and estimates coefficients for each financial variable • Once relationship is established, user inputs subject company’s financial data • Ordered Logit estimates the probability of that company being assigned each of the 22 different credit ratings • Rather than specifying a predicted value (or rating), the model provides a distribution across credit ratings • The synthetic credit rating falls within the range of credit ratings with the highest estimated probabilities © Grant Thornton LLP. All rights reserved. 69
    • 70. Ordered Logit Model Example of distribution • In this example, the model estimated a synthetic credit rating in the range of B+ to B- for this particular company Credit Rating Distribution 35.0% 32.8% 29.4% 30.0% Percent 25.0% 20.0% 17.9% 15.0% 8.1% 10.0% 5.0% 0.2% 0.5% 0.7% 0.9% BBB+ BBB BBB- BB+ 6.4% 2.3% 0.8% 0.0% BB BB- Rating © Grant Thornton LLP. All rights reserved. 70 B+ B B- CCC+ CC
    • 71. Ordered Logit Model Example of output from Grant Thornton oLogit model Subject Company Financials Total assets Subject Company Ratios $9,172.1 Natural Logarithm of total assets 9.12 Total debt 774.5 Debt ratio 0.08 Revenues 24,864.3 EBIT / Total debt 3.75 EBIT 2,904.4 Return on assets 0.19 Net income 1,777.2 EBIT margin 0.12 Credit Category Probabilities AA and above 9.18% A+ 9.61% A 18.29% A- 16.45% BBB+ 17.94% BBB 15.58% BBB- 5.95% BB+ 2.73% BB 1.94% BB- 1.24% B+ 0.72% B 0.31% B- 0.05% CCC+ and below 0.02% Quantitative Credit Rating © Grant Thornton LLP. All rights reserved. A 71
    • 72. Comparison of results • Grant Thornton tested several methodologies to estimate the synthetic credit rating • Grant Thornton selected 10 random companies to represent good cross section of the universe • Tested dependability of the credit rating: – – – – – Size of assets (regression) Leverage (regression) Interest coverage ratio (regression) Damodaran credit rating model Ordered Logit Model © Grant Thornton LLP. All rights reserved. 72
    • 73. Comparison of results (continued) Company Name Rating Regression: Regression: Log Assets Debt/Assets Regression: Interest Coverage Ordered Logit Damodaran The TJX Companies, Inc. A BBB- BBB- BB A AAA eBay Inc. A BBB+ BBB- BB A AAA AutoZone, Inc. BBB BB+ BB- BB BBB AAA Roper Industries Inc. BBB BB+ BB+ BB BBB AAA R.R. Donnelley & Sons Company BB BB+ BB BB B+ B+ Teleflex Incorporated BB BB BB+ BB B+ BB+ Nortek Inc. B BB- BB- BB B CCC Hercules Offshore, Inc. B BB- BB BB B+ D Milagro Oil & Gas Inc. CCC B BB- BB CCC D Stanadyne Corporation CCC+ B BB BB B CC Regression (X variable) R Square Asset size (Log of Assets) 42.2% Debt/Assets 19.5% Interest coverage 0.1% © Grant Thornton LLP. All rights reserved. 73
    • 74. Valuation of Debt and Debt-like Securities Learning objectives / Agenda (continued) • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt • List the pros and cons of each synthetic credit rating methodology • Identify how to factor in debt's seniority, presence of collateral and third-party guarantee into the yield • Recognize how to develop the market yield for the debt © Grant Thornton LLP. All rights reserved. 7 74
    • 75. Credit rating Adjusting for seniority and collateral • It is extremely important to understand that the developed synthetic credit rating is for the company, not for a specific debt • One should adjust estimated rating based on considerations of collateral and seniority – No adjustment for senior unsecured debt as a company’s corporate rating is most closely aligned with senior unsecured debt – Secured debt: rating may be adjusted upward – Subordinated or mezz debt, preferred stock: rating may be adjusted downward – “Investment vs. non-investment grade” profile dictates magnitude of adjustment © Grant Thornton LLP. All rights reserved. 75
    • 76. Credit rating Adjusting for seniority and collateral (continued) Debt type Subordinated debt** (Unsecured, subordinated, holdco) Metrics Expected recovery on subject debt Priority debt/Total Assets Subject debt/Total assets Corporate Rating = Threshold* Investment Grade >= 80% Same as corporate Corporate Rating = NonThreshold* Investment Grade >= 80% Same as corporate < 20% >= 15% Same as corporate Up to 1 notches below >= 30%*** Up to 1 notches below >= 30%*** Up to 2 notches below >= 20% >= 30% Preferred stock Priority debt/Total Assets None Up to 1 notches below 2 notches below Up to 2 notches below Senior PIK debt None 1 notch below 2 notches below Subordinated PIK debt None 2 notches below At least 3 notches below At least 3 notches below * Factors that increase or decrease the threshold are (1) atypical asset mix and (2) the relative size of the subordinated debt debt in relation to the assets assumed to remain after satisfying the more senior layers. ** The lowest-ranking issues will never be rated lower than one notch under the investment-grade corporate credit rating, or two notches in the case of noninvestmentgrade corporate credit ratings. *** Based on S&P example. Not a specific guideline. Source: Standard & Poor's Corporate Ratings Criteria, 2006 © Grant Thornton LLP. All rights reserved. 76
    • 77. Valuation of Debt and Debt-like Securities Learning objectives / Agenda (continued) • Recognize the driving factors behind the debt's credit rating • List methodologies to develop a synthetic credit rating for the subject company and the subject debt • List the pros and cons of each synthetic credit rating methodology • Identify how to factor in debt's seniority, presence of collateral and thirdparty guarantee into the yield • Recognize how to develop the market yield for the debt © Grant Thornton LLP. All rights reserved. 7 77
    • 78. Credit spreads and yields Components of risk • In a business enterprise analysis, the cost of equity using CAPM can be broken down into the following factors – – – – – risk-free rate industry factors (beta) market factors (ERP) size (small stock premium) company-specific factors (achievability of PFI and other unique risks) • In the valuation of debt and other debt-like instruments, the discount rate or yield is typically composed of the following factors – risk-free rate – spread (or risk premium) • • • • Industry factors Credit risk (typically reflected in the credit rating) Maturity (longer term is deemed to be more risky, all else equal) Timing of cash flows (e.g., bullet maturity has more risk than amortizing debt) © Grant Thornton LLP. All rights reserved. 78
    • 79. Credit spreads and yields Spreads • Companies often rely on the following measures of credit spread – Option-adjusted spread ("OAS") – Credit default swap ("CDS") spreads • Sources of data – Merrill Lynch Indices (High Yield, Corporates, rating- or industryspecific) • Reuters • Bloomberg – Comparable debt issuances • Capital IQ © Grant Thornton LLP. All rights reserved. 79
    • 80. Credit spreads and yields OAS vs. CDS spread • OAS – Spread that equates the present value of all future cash flows of a debt instrument with its market price – Adjusted for embedded options, such as conversion options, calls, or put options – Allows for better comparison of yields across different types of debt instruments • CDS spread – Credit default swap is a credit derivative that provides protection to the buyer from a default by a particular company or entity (or reference entity) – The protection buyer makes periodic payments to the protection seller for the right to sell a bond issued by the reference entity to the protection seller for its face value upon a credit event – CDS spread is the annual rate paid by the buyer to the protection seller © Grant Thornton LLP. All rights reserved. 80
    • 81. Credit spreads and yields OAS vs. CDS spreads OAS CDS spread • OAS are available for all entities • CDS spreads are available for a that have issued bonds that are more limited universe of trading in the market reference entities • OAS are available for a wide • CDS spreads are available in range of maturities maturities of 1, 2, 3, 5, 7 and 10 years only, but are most liquid • OAS are not affected by for a 5-year maturity counterparty risk (compared to CDS spreads) • CDS spread includes the risk of both counterparties’ nonperformance © Grant Thornton LLP. All rights reserved. 81
    • 82. Credit spreads and yields Screening for comparable OAS • We recommend relying on OAS when estimating yields • Screening for comparable OAS is similar to finding comparable debt • Make sure proper adjustments were made from the corporate rating to debt-specific rating based on the following: – Seniority (senior vs. subordinated) – Collateral (secured vs. unsecured) • Select appropriate OAS based on – Credit rating (adjusted for seniority and collateral) – Maturity / duration (OAS curve is typically upward sloping, but not lately) – Industry of issuer (only if credit rating was developed based on industry; use consistent universe) © Grant Thornton LLP. All rights reserved. 82
    • 83. Credit spreads and yields Estimating credit spreads Method 1: Absolute approach • Estimate spread as of the Valuation Date independently from the spread as of issuance • Used when the issuance date is stale (more than 2 years has passed) or when the Company’s financial position / credit profile has changed significantly since the issuance date Steps: • Estimate a synthetic credit rating as of the Valuation Date • Select an appropriate OAS as of the Valuation Date based on the estimated credit rating © Grant Thornton LLP. All rights reserved. 83
    • 84. Credit spreads and yields Estimating credit spreads (continued) Method 2: Relative approach • Observe change in spread since issuance • Used when the issuance date is relatively recent and there were no changes in company's risk profile Steps: • Observe an OAS as of the issuance date (validate the synthetic credit rating or see where OAS falls relative to ratings) • Observe change in spreads between the issuance date and the Valuation Date • Estimate the OAS as of the Valuation Date © Grant Thornton LLP. All rights reserved. 84
    • 85. Selecting OAS All data Number of data points Low 25th Percentile 75th Percentile High Average Median BB BB- Overall 322 800 Universe 2,147 BB+ 204 BB 274 -4 291 547 53,790 45 220 337 691 104 235 338 787 35 270 391 1,961 545 383 287 269 298 276 350 317 © Grant Thornton LLP. All rights reserved. B B- Overall CCC+ 304 882 263 B+ 248 B 330 35 245 357 1,961 159 297 423 984 108 321 492 1,338 79 375 648 1,952 79 327 531 1,952 316 290 377 347 425 388 536 485 449 404 85 CCC 134 CCC CCC- Overall 34 430 -4 470 718 2,744 44 562 968 4,195 406 792 1,530 5,002 44 492 855 5,002 433 1,779 1,095 8,999 2,038 18,089 5,312 53,790 626 557 914 735 1,402 1,243 779 619 1,780 17,596 1,647 13,775 CC 26 C 8
    • 86. Selecting OAS Filtered data Filtered (OAS) Seniority Exclude finance Exclude utilities Industry Ticker Maturity (years) Maturity bound (+/- years) Number of data points Low 25th Percentile 75th Percentile High Average Median Filter Detail Senior n/a n/a n/a CLH 2.50 2.50 Filter Enabled Yes Yes Yes No No Yes Yes Filter Count Removed 1,490 -657 1,402 -88 1,367 -35 1,367 0 1,367 0 403 -964 403 0 BB BB- Overall 55 154 Universe 403 BB+ 38 BB 66 0 329 640 38,131 0 241 377 553 0 277 376 568 0 311 454 653 669 458 303 311 324 320 385 377 © Grant Thornton LLP. All rights reserved. B B- Overall CCC+ 45 135 48 B+ 31 B 62 138 282 394 653 0 367 527 1,101 258 386 561 1,461 0 508 686 1,408 169 418 611 1,461 351 336 474 473 502 473 591 610 536 500 86 CCC 38 CCC CCC- Overall 9 93 0 560 799 1,965 179 705 932 4,898 478 625 2,202 5,157 133 602 937 5,157 712 621 1,013 820 1,931 1,027 968 745 CC 10 C 1 788 1,353 1,835 2,143 38,131 38,131 38,131 38,131 1,516 38,131 1,510 38,131
    • 87. Contact Information David Dufendach John Ferro Partner Valuation Services Seattle 206.398.2476 David.Dufendach@us.gt.com Managing Partner Valuation Services New York 212.542.9574 John.Ferro@us.gt.com Oksana Westerbeke Managing Director Valuation Services Boston 617.848.4850 Oksana.Westerbeke@us.gt.com © Grant Thornton LLP. All rights reserved. 87
    • 88. Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser. © Grant Thornton LLP. All rights reserved. 88
    • 89. Thank you for viewing this presentation. Visit us online at: www.GrantThornton.com twitter.com/GrantThorntonUS linkd.in/GrantThorntonUS © Grant Thornton LLP. All rights reserved.