medium · Private Credit loan-structures-instruments
Under ASC 820, a private debt fund holds a loan to a company that recently lost its primary customer, causing the yield of similar-risk assets in the market to increase.
How should the fund classify this asset's valuation, and what is the primary driver of the fair value change?
- Level 3; both credit-specific deterioration and market-wide yield shifts.
- Level 2; market-wide yield shifts as the asset is compared to broadly syndicated benchmarks.
- Level 1; since the loan principal is fixed and recovery is estimated by the board.
- Level 3; strictly limited to credit-specific deterioration to avoid 'smoothing' income.
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