For background, I am a boutique M&A advisory banker. A client of mine was looking at a potential acquisition target that is nearing distress with a large quantity of debt. We wanted to emphasize the deterioration in credit quality by pointing to the trading prices of the target’s bonds.
We are a small boutique with no capital markets desk or credit experts, so we’ve had to try to figure this out ourselves. In the past, we’ve largely used pricing and YTM data per TRAC from the Bloomberg terminal (under the assumption that these are the most “defensible” given this reflects actual trade data), but there are a bunch of other “sources” we don’t fully understand: BVAL, BMRK, CBBT, BGN, etc. and also differences vs. FactSet’s DCS data.
My question is: For our narrow purpose of trying to show declining credit quality of a company (as opposed to actual real-time trade execution or capital raising purposes), what is the best source for trading price and YTM? Have we been going about it the wrong way?
For your purpose of demonstrating declining credit quality in a company, Bloomberg's TRAC data is indeed a strong choice. TRAC reflects actual trade data, making it highly defensible and reliable for your analysis. However, understanding the other sources can help refine your approach:
TRAC (Trade Reporting and Compliance Engine): As you mentioned, this is based on actual trade data, making it one of the most reliable sources for pricing and YTM. It’s particularly useful for defensible analysis since it reflects real transactions.
BVAL (Bloomberg Valuation): This is Bloomberg's evaluated pricing model, which uses a combination of market data, comparable securities, and proprietary algorithms. While it’s not based solely on actual trades, it can be useful when trade data is sparse or unavailable.
CBBT (Composite Bloomberg Bond Trader): This aggregates quotes from market makers and provides a composite price. It’s more indicative than TRAC but can be helpful for gauging market sentiment when trades are infrequent.
BGN (Bloomberg Generic): This is a consensus price derived from contributed quotes. It’s less reliable than TRAC for your purpose since it’s not based on actual trades but can provide a broader market view.
FactSet DCS (Debt Capital Structure): FactSet’s data is another alternative, but it may not be as widely accepted or defensible as Bloomberg’s TRAC for your specific use case.
Recommendation:
Stick with TRAC for your analysis, as it provides the most defensible and trade-based data. If you encounter situations where TRAC data is limited, you can supplement it with BVAL or CBBT for additional context, but always disclose the source and methodology to maintain transparency. Avoid relying solely on indicative pricing like BGN for critical analyses, as it may not hold up under scrutiny.
By focusing on TRAC and supplementing with other sources as needed, you’re on the right track for showcasing the deterioration in credit quality effectively.
Sources: Q&A - High Yield/Distressed Debt Sell Side Analyst, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Debt for LBO?, Q&A: CB -> CIB -> Distressed, All about Treasury/ Corporate Treasury!
Taking a shot in the dark at this, but why not show the CDS spread? Should show the creditworthiness of the company declining without running into the liquidity issues of tracking real time trades on the underlying
Not a bad idea. What source do you use for that?
Still interested in the original question though for future reference (re: source for price and YTM).
Use FINRA TRACE for bonds (accessible via the FINRA website as well as FactSet) and S&P for loans. FactSet’s “DCS Detail” tab is a good place to find CUSIPs and Loan IDs to input in these sources if you don’t already have them.
Bloomberg’s TRAC data is the right one to use for historical price/YTM data since BVAL can be manipulated by traders discussing what they would trade at (so I’ve heard). The above sources I listed are the best if you need the most accurate pricing data as of a certain date. An additional benefit of these sources is they show the trading volume for that certain price so you can see if the block was meaningful enough to include in the data set.
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