31 May 2023

Toolbox Guidance: Alternative Credit

The SBAI Toolbox Guidance on Alternative Credit helps investors understand asset class specific challenges and undertake due diligence of valuation arrangements, fund structures and conflicts of interest.

Private debt/alternative credit refers to debt securities and loans that are not publicly traded. The asset class appeals to some investors by generating consistent income streams, often with a risk profile that falls between traditional fixed-income investments and equity holdings.

Unlike publicly traded assets with readily available market prices, valuing private debt instruments can be complex and subjective. The Alternative Credit Valuation Memo highlights the key features of a robust valuation framework, illustrates the fair value process for direct loans and provides the key questions for investors to ask during due diligence.

Alternative Credit strategies often hold illiquid assets. To align investor interests with the underlying portfolio and avoid liquidity mismatches in the fund, more restrictive fund liquidity terms are required. The Alternative Credit Fund Structuring Memo details some of the key considerations for closed-ended and open-ended credit fund structures, disclosure requirements, as well as the handling of situations where normal redemption mechanics might not apply.

In Alternative Credit funds, there are specific conflicts of interest that can arise due to the nature of the strategy. The Alternative Credit – Conflicts of Interest Memo identifies the specific conflicts of interest that can arise in funds investing in alternative credit, for example in situations where different funds invest in different parts of a company’s capital structure and where one fund refinances a loan held by another fund.

The Alternative Credit Memos complement the SBAI Standards, which address a wide range of issues in relation to valuations, handling of conflicts of interest, governance, and liquidity risk management.

Our Private Markets Valuation Working Group is also active presently and is tasked with the goal of providing guidance to investors on the challenges and conflicts involved in valuation of less liquid asset classes. SBAI Members can get involved in this Working Group here.


Resources on Alternative Credit

Alt Credit.jpg 1
Login required

Alternative Credit - Valuation

Alt Credit.jpg 1
Login required

Alternative Credit - Fund Structuring

Alt Credit.jpg 1
Login required

Alternative Credit - Conflicts of Interest


Related topics