Volatile Values: Credit spreads make a stifled return in the private debt market…

It's been more than five months since the UK lockdown was announced, and with it came soaring credit risk premia for both publicly traded and private debt in an increasingly illiquid and volatile market (see our previous blog on the initial impact of coronavirus (COVID-19) on illiquid debt valuations).

Though lockdown measures have been eased since - with shops reopening in June and some travel restrictions eased in July - the full impact on the economy is still uncertain and debt markets have partially reversed, yet not recovered to pre-COVID-19 levels.

We saw more than 400 credit rating downgrades in Q2 2020[1] for external credit ratings by rating agencies for U.S. corporates alone, with some expecting the economic downturn could have a negative impact on credit ratings all the way up to 2023.[2]

Lenders of private debt issuances are now revising their internal credit risk assessments after updated financials from borrowers are coming in, some with a delay due to COVID-19. This is leading to potential internal credit rating uncertainty as the financial impact of COVID-19 starts to become visible whilst there is still uncertainty around forecast numbers. It seems equally possible that both future rating downgrades and credit ratings bouncing back up if a V-shaped recovery of developed economies materialises could happen. Uncertainty is the current certainty.


Charts were generated using daily bond mid z-spreads for vanilla bonds and option adjusted spreads for callable bonds sourced on Refinitiv Datastream. Bond z-spreads were sourced from liquidly traded, senior unsecured bonds with a time to maturity close to 5Y.

Valuers are assessing how much of the recovery in credit should be passed on when valuing their private debt portfolios, leading to an increase in value of their positions. Factors to watch out for since the first quarter of the year remain:

  • Understanding the bespoke credit risk profile of borrowers is more important than ever as updated financials, performance updates and revenue forecasts, which factor in the impact of COVID-19, are made available, leading to a potential downgrade in internal credit rating assessments.
  • Valuations might differ significantly depending on credit benchmarks selected as volatility in the debt market persists and credit spreads remain at elevated levels compared to the pre-COVID-19 environment.
  • Considering illiquidity premia as part of the valuation remains crucial as they are still more material than in non-crisis times with markets having not fully recovered.
  • Sub-investment grade remains more affected by elevated credit spreads than investment grade debt, with the basis between sub-investment grade and investment grade credit still wider than pre-COVID-19 levels.

Contact us

Chris Heys

Chris Heys

Partner, PwC United Kingdom

Tel: +44 (0)7715 034667

Annika Buss

Annika Buss

Manager, Valuations, Financial Services, PwC United Kingdom

Tel: +44 (0)7718 976655

Nebil Shubbar

Nebil Shubbar

Senior Manager, Valuations, Financial Services, PwC United Kingdom

Tel: +44 (0)7525 284246

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