Five concerns when valuing illiquid securities

Larry Levine (McGladrey) outlined the key valuation drivers for a fixed income security yesterday in his sessionValuing Illiquid Financial Securities” at the ASA/CICBV Business Valuation Conference.

  1. Forecast of coupon payment–fixed or floating rate
  2. Consider financial impact of embedded options:
  • a. right to prepay, right to call
  • b. right to convert into another security
  • c. interest rate floors or ceilings
3.  Assess impact of credit risk–risk and monetary impact of potential default

4. Time to maturity

5. Discount rate –required market derived yield for a security given its creditworthiness

“One of the biggest challenges is the discount rate," Levine said, “With a large public company you can find the discount rate on Capital IQ.  But for private companies there isn’t a similar database."