Are there any ways to find the intrinsic value of a bond/TL?

To determine the intrinsic value of a bond or term loan (TL) for liquid credit shops, here are some approaches based on the most helpful WSO content:

1. Discounted Cash Flow (DCF) for Debt Instruments:
   While DCF is commonly used for equity, it can also be applied to bonds or credit facilities. You would discount the expected cash flows (interest payments and principal repayment) using an appropriate discount rate. The discount rate should reflect the risk profile of the bond or TL, which could be derived from the yield of comparable instruments or the issuer's credit rating.

2. Market Comparables:
   Similar to equity valuation, you can look at comparable bonds or credit facilities in the market. Analyze their yields, spreads, and trading prices relative to their credit quality, maturity, and covenants. If the bond is trading at 80, but similar instruments with comparable risk profiles are trading at 90, this could support your thesis that the bond is undervalued.

3. Credit Metrics and Recovery Analysis:

   • Debt Paydown and Waterfalls: While you mentioned this doesn’t directly give the intrinsic price, it’s still a critical component. Understanding the recovery rate in a downside scenario can help you assess whether the bond is trading at a discount relative to its expected recovery value.
   • Leverage Ratios and Coverage Ratios: Evaluate metrics like total leverage, interest coverage, and fixed charge coverage ratios. If these metrics suggest the issuer is in a stronger position than the market perceives, it could justify a higher intrinsic value.

4. Covenant Analysis:
   Review the covenant package of the credit facility. Stronger covenants can provide downside protection, which might justify a higher intrinsic value. For example, if the bond has restrictive covenants that limit additional debt issuance or asset sales, it could reduce risk and support a higher valuation.

5. Subjective Discount Rate:
   As highlighted in WSO discussions, the discount rate is subjective and varies by investor. If you believe the market is overestimating the risk (and thus applying a higher discount rate), you could argue for a lower discount rate, which would increase the intrinsic value of the bond or TL.

6. Market Sentiment and Liquidity:
   Sometimes, bonds trade at a discount due to temporary market dislocations or liquidity issues rather than fundamental credit concerns. If you can identify such situations, you can build a thesis that the bond should trade closer to its intrinsic value once the market normalizes.

By combining these methods, you can build a robust thesis for why a bond or credit facility trading at 80 might be intrinsically worth 90.

Sources: Private Credit Resources and Prep, DCF Modeling Course ~ Pre-training text.pdf, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Walk me through a DCF, Relationship among Cap Rate, IRR, Discount rate and NPV