Private Credit Gets Marked Down
Mark-to-market accounting, Kalshi call spreads, ChatGPT privilege and random number generators.
Let’s say I lend a software company $100 for five years at 8% interest. I give the company $100 in cash, and it gives me back a note promising to pay me back, which I enter into my accounting system as a $100 asset. The next day, Anthropic releases some new artificial intelligence tool, people get nervous about the software business, and software stocks and bonds drop. The yields on loans to other software companies, companies that are similar to my borrower, go up by 0.5% over the course of the day. I call up my borrower to check in, and they say “oh yeah, we saw that headline but we’re not too worried, everything’s fine.” How much is my asset — the company’s note — worth?
There is a conventional answer, which is about $98.1 The price of a debt instrument moves inversely with interest rates; as the market demands higher interest rates from borrowers like my software company, the value of those companies’ existing debt goes down. If I sold my note for $98, the buyer would get a yield of 8.5%, which is the new market rate. The “mark-to-market value” of my note is $98.