You know I don’t like WACC. Yet another reason is that it requires market value weighting of debt as well as equity. Corporate debt yields have risen considerably, so fixed-rate company debt has lost market value. Debt valuation is thus more complicated, and has to be thought through in any valuation, but particularly if you use WACC.
Yes, borrowers are still obligated to repay their debt, but rising rates mean that fixed rate debt is worth less just on the basis of discounted cash flows. Lenders may be willing to accept less than par value because of this. Alternatively, they may themselves be strapped for cash and willing to extend payment terms (which also reduces the discounted cash flow value if nothing else changes.) Private equity firms are aggressively repurchasing their obligations to take advantage of this.
IBA’s Annual Symposium is scheduled for May 27-30 in Boston, to run concurrently with the NACVA Conference. This is a great two-fer chance to earn some CPE and network with peers. Howard Lewis, IBA’s new Executive Director, would love to hear from any IBA member, regardless of whether you are new or an old hand, who might be interested in helping insure that the conference is successful. Please contact him directly at IBA headquarters.