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FAS 157 Level 3 Fair Value Measurement & Disclosures for Credit Instruments - Consulting Services
About this product
Credit instruments like corporate term loans, credit lines, revolving credit facilities, letters of credit, etc are customized for the borrower and have highly illiquid markets. The assumptions and inputs are unobservable and primarily based on management’s assumptions of credit worthiness, default, prepayments, recovery, etc. Given the nature of the inputs under the FAS 157 standard these instruments are classified for Level 3 fair value measurement.
FAS 157 Level 2 & 3 Valuations
FAS 157 requires that assets and liabilities be valued at their fair values on the measurement date. The focus is on the determination of an exit price, i.e. the price at which an asset will be sold or a liability paid for to be transferred in an orderly transaction between market participants. The standard defines a hierarchy under which all assets and liabilities are to be classified and based on which are to be valued either using the Market, Income or Cost approaches.
Level 1 assets and liabilities are those for which an active market is available and quoted prices are directly observable.
Level 2 assets and liabilities do not themselves have observable prices but are based on assets and liabilities for which such prices are directly (quoted prices) or indirectly (yields, etc) available.
Level 3 assets and liabilities have unobservable prices as they are very illiquid. Their fair value will usually be based on assumptions and management judgement.
Level 1 assets and liabilities are valued using the Market Approach which is based on market observable prices (marked to market).
Level 2 assets and liabilities are valued using either the Market Approach or the Income approach. The later approach discounts projected future cash flows to a single value on the valuation date.
Level 3 assets and liabilities are valued using either the Income approach or the Cost approach. The latter approach assesses the cost of acquiring a substitute instrument with the same utility.
Level 2 & 3 assets for which Income Approach is feasible may be valued using a number of present value techniques, such as probability weighted future cash flows discounted for the risk free rate & systemic risk spread or contractual cash flows discounted using a discount rate that reflects expected future risk.
Consulting services – Credit facility valuations
Consulting services for valuation of Level 2 & Level 3 assets and liabilities for FAS 157 include up to 20 hours of consulting support services that are generally utilized for quarter end valuation disclosures. We have been delivering timely quarterly FAS 157 disclosures for US and North American clients for the last 3 years.
Consulting services include valuation services for a given instrument or facility on a given counterparty name as of one given valuation date.
For USD denominated Level 3 assets and liabilities, such as an institutional term B loans & revolving credit facilities for which there are no observable markets but where future cash flows are indexed to the US Treasury yield curve or US LIBOR rate, FAS 157 valuation services include (based on the nature of the instrument and the time and data resource constraints present):
- Bootstrapping the zero curve and forward rates from US Treasury yield curve rates for each date in a given look back period
- Projecting forward rate term structures using a Heath Jarrow Merton interest rate model and related projected zero rates, if prepayments are to be modelled
- Constructing prepayment rate, default rate and usage rate models, if these assumptions are to be modelled
- Constructing the loan valuation model based on terms and conditions of the given Level 3 instruments using the projected interest rate term structure, and considering probabilities of default and prepayments & rates of usage and recovery to determine future cash flow streams and discounted cash flows
- Submitting a FAS 157 valuation report presenting the results, assumptions and methodology
To place an order for FAS 157 valuation services please drop us a note with the details of the asset or liability in question to confirm availability and timelines before placing the order. Depending on the nature of the asset/ liability in question, the scope of the assignment and our prior commitments the delivery for valuation services ranges between 2 - 4 weeks.