Calculating Market Value of Debt from a 10-K report
When calculating enterprise value, I can find the market value of equity for a firm using various websites, but cannot find the market value of debt. I have been looking through the 10-K report for the firm and cannot find the factors needed to calculate it (interest, % current cost of debt, weighted average maturity). Any recommendations for calculating market value of debt? Or how to estimate it? Thanks in advance!
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I thought that was book value of debt? I added together Long-term debt and current portion of long term-debt (since they both accrue interest) and got that value. Do I have to add something else to get market value? Thank you for your help
If not disclosed, you will need to seek out a third party source that provides the latest trading data for the company's debt securities (if they are publicly traded). The Finra website is a good free source for starters if the company has a lot of publicly traded bonds but it won't capture things like term loans or a revolving credit facility. Generally, the RCF should be marked at a 1.0, or close, unless the company is totally underwater.
http://finra-markets.morningstar.com/BondCenter/Default.jsp
Thank you for your help, I am researching past companies-pre-merger, so a lot of these companies are not present on the website. I will just use book value for calculations.
probably assume they’re at book value unless the company was in distress...if there is a decent equity value then realistically debt can be priced at par (due to it being higher in the cap stack)
Very rare to use market value. Debt usually can’t get taken out at market value so you use book. Market value more relevant in a distress situation in which case you’d look where it’s trading at; 10k irrelevant there.
Ah, thank you for the explanation, that makes a lot of sense!
Market value of debt can be quoted and is relevant for firms looking to refinance their bonds,analyze the cost to call the bond or if holders put such bonds, what change of control provisions look like and how debt may travel in a pre/post-merger entity etc.
The correct response to your question is that it's common practice to just use par for MV debt but Dikhinmahas saying that "debt usually can't get taken out at market value so you use book" is plain wrong. It's definitely not just "relevant in a distress situation".
Just a bunch of hardo bullshit.
OP is trying to calculate EV, not trying out to be a TTS instructor.
Yes hardo, in certain live engagements the client may want to see an analysis of breakage costs on the debt, make whole payments etc. That's what I meant when I said you can't take bonds out at market value most of the time. Tell me a time when a company just went on the market and took out all their debt at market prices. So you call me wrong and then show exactly why I'm right. Nice. Helped nobody, but nice.
OP: no need to take my word for it, just read Goldmonkey Sachs answer below which says the same thing I did.
I would think about what is the goal of your analysis first. Your rarely need market value of debt for most M&A and financing scenarios, except in situations like some described above in which it is fair to assume the difference between book and market values is substantial.
In any non-distressed case, all you do is take the book value of each tranche of debt per the latest filing (so basically, the principal amount outstanding and NOT the amount net of issuance fees and amortization), the interest rate on each tranche (normally available in more detail in 10-Ks), and calculate the WACD.
You then can presume that is the market cost of debt, since theoretically the company will issue debt that will not change its credit ratings so the pricing of new debt should be in line with the existing debt.
Makes sense?
I'm sorry but I do not think I fully understand.
I would use the line items of Long-Term Debt and Current Portion of LT-Debt and sum them to get the principal debt the firm is trying to pay off. Then I would find the interest rate of that debt from the 10-K and calculate WACD, which would be my market value of debt?
I know some 10-K state that "The debt bears interest at floating rates therefore the carrying value approximates fair value" which means BV=MV. If that were not the case, it would give me a % interest rate on their debt, like an average?
What I’m saying is, think about what you really need. Sounds from your original post that what you want is just the amount of debt to build a bridge to Enterprise Value (let me know if this is not correct). If that is the case, you do not need market value of debt. All you need is the principal amount of the long term debt per the latest filing (again, principal amount, not carrying value since that is net of amortization, fees, etc.). That’s what 99% of people are going to use to value the business (as long as it’s not distressed/special situation).
That makes sense. To find only the principal amount, do I add the line items of Long-Term Debt and Current Portion of LT Debt? That is what I have been doing so far, that is the principal amount?
Well, to be sure, you are going to want to find the capital structure broken down by tranche of debt. This is traditionally in one of the K’s or Q’s “Notes to financial statements” (or “Items”).
Reasons for this are (1) that sometimes, in the reported long-term debt, companies include operating leases and other items that should not be capitalized for valuation purposes because we are already accounting for them in our operating metrics (EBITDA, for example, which usually includes lease expenses or rent, so we don’t want to double count the impact of these leases when thinking about trading multiples); (2) companies might report their long-term debt in their financial statements inclusive of fees and amortization, rather than have the principal amount and show these somewhere else. Thus, you want to make sure you are looking at principal amounts, and the only reliable way of doing that is looking at their debt section in their filing.
I know it’s a pain to go tranche by tranche, but that is the correct way to do it. That being said, I want to bring up again my point earlier. I am sure you are already doing it, but always try to think of the goals of your analysis and the detail required. If you are looking for “quick and dirty” multiples for various companies, using the reported debt from the balance sheet might suffice, because the little differences like capitalized debt discounts and so on won’t really change the analysis much. If you are trying to analyze one specific company and truly understand how it trades, then being more accurate becomes crucial, but you must also be aware of not falling for a false accuracy error. Sometimes we can only do so much to analyze a business or financial statement.
Please let me know if this makes sense. If not, I can find a Q or a K and show you exactly what I mean.
MV of debt is calculated much the same way that you calculate MV of equity in a current val. Bonds and TLs generally get traded on the secondary market, so you look at what they're trading at (quoted as cents on the dollar) and multiply that by the principal amount outstanding of each tranche. Revolvers generally don't trade and are assumed to be priced at 100.
Example: Company has an L+4.50% Revolver w/ a $100mm borrowing base and $50mm drawn, an L+6.50% $200mm 1L TL due 2024, and $500mm 10.00% Notes due 2027. The TL is trading at 80 and the Notes are trading at 70.
MV of debt = (50x1)+(200x.8)+(500x.7) = $560mm
Be careful with this approach. Sometimes, the float on TLBs is very limited and the price quoted on BBG is not representative due to iliquidity. A loan quoted at 80 does not mean the company could buy back the full principal amount at that price.
If you use TRACE on BBG, you can look at actual trading history as opposed to quotes. You can also use a platform that only displays actual trades, like Markit.
No offense, but an M&A analyst is almost certainly not going to tell me something I don't know about RX; much the same way that I'm almost certainly not going to tell you something you don't know about merger model mechanics.
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