Guidelines

To comply with the INREV NAV requirements, financial liabilities, including debt obligations should be measured at fair value, if not yet accounted for at fair value by the accounting standards of the vehicle. How should members calculate the fair value of debt obligations, and what are the most common methodologies that should be used?

Debt instruments, unless traded on an active market (where the fair value is readily available) or unless non-performing, are commonly valued using a discounted cash flow (DCF) valuation method. Cashflows are derived from the contractual terms of the loan, be it fixed or floating rate based, with or without prepayments. For the floating rate, one has to calculate the forward rates based on the floating rate index for each future interest rate period and compute the cashflows accordingly.

The discount rate would be typically driven by both market conditions and credit risk profile. The market conditions element would reflect the risk-free rate (currency and debt maturity specific). The credit risk element would be borrower-specific and based on default probabilities/ credit default spreads of the borrower (or similar borrower profile).

The credit risk can be derived from the initial debt placement but would require an update for any changes in the borrower’s credit risk profile. Observable transactions, when available, can be used to corroborate the results of the DCF approach. Examples of this can be found  here.

Amortised cost (determined in accordance with the accounting standards, eg IFRS) is not an appropriate estimation of the fair value of debt, even though it may approximate to the fair value in some particular circumstances, such as immediately after the debt instrument’s date of issuance. Please refer IVS 500 Financial Instruments (IVS 101 Scope of Work, para 20.3.(d), IVS 102 Investigations and Compliance for more information

For the purposes of calculating INREV NAV, INREV does not prescribe one specific or preferred methodology for the revaluation of debt obligations to fair value. Each financial instrument has its own characteristics and market circumstances might be different over time. Furthermore, as the adjustment [j) Revaluation to fair value of financial assets and liabilities] may have a material impact on the total INREV NAV, the investment manager should assess if an external expert should be used for the assessment of such adjustment to INREV NAV and/or the NAV used for pricing purposes for open ended funds. Regardless of the methodology used, the results of this process along with the key assumptions should be transparently reported to investors.