“If I had a world of my own, everything would be nonsense. Nothing would be what it is because everything would be what it isn’t. And contrariwise, what it is, it wouldn’t be, and what it wouldn’t be, it would. You see?” – Lewis Carrol, Alice’s Adventures In Wonderland

Most people reading this article know that our business involves helping clients understand what their loan portfolios are worth today, via Fair Value, or could be worth based on future changes, via Stress Testing or CECL calculations.

Providing Fair Value is complicated from a modeling perspective, but quite straightforward to do conceptually based on our massive database:

Each month we scrape new origination information from the hundreds of thousands of loans we see from our clients, sale prices from DebtX’s secondary market desk, and the third-party data we source from vendors. We parse that pricing data according to loan types and credit characteristics, and then import it into our models. Because we see more new originations (and loan portfolio data in general) than anyone but for a regulatory entity, we feel quite confident that our valuations reflect actual market prices.

However, just because we can accurately tell you what the market price for a loan is, the question of what drives that price can be a bit confounding.  Excepting moves that reflect changes in underlying benchmark rates, credit spreads have marched inexorably tighter since the early phases of the pandemic and seem unfazed by events and news that would historically give lenders pause.

Persistent inflation? No problem – lower spreads!

Recurring Covid spikes? Easy peasy…we can just tighten spreads.

Geopolitical turmoil? Please sir, I want some more…low spreads that is.

It has been incredible to watch our market, and most markets, shrug off bad news in spectacular fashion. We would love to hear YOUR opinions on what is driving loan pricing, how long will the current run last, what you may be doing to hedge your bets and what the “final straw” would be to break the camel’s back.

Please reach out to Will Mercer, directly at wmercer@debtx.com and share your insights. You can also reach him at 617-531-3429. We will respect folks’ privacy of course, but would love to tally the responses and craft them into a straw poll to share among people who reach out.

Look forward to hearing from you!

Will Mercer, Managing Director – Analytics