Definition
At origination the transaction price is the best available evidence of fair value, so the model is solved to return that price: the discount margin or spread is backed out so the model output equals what was actually transacted. That calibrated spread becomes the anchor. On subsequent measurement dates the mark is updated by moving the spread on recorded drivers — a change in the borrower’s credit quality, a move in comparable market spreads, a covenant or performance trigger — rather than by re-guessing the level from scratch. Under IFRS 13 and ASC 820 this is how a Level 3 model stays tethered to observable reality despite unobservable inputs: it begins at a real price and every later move is attributable. The discipline is that drift must be documented, so the path from the origination mark to the current mark is reconstructable.
Why it matters in private credit valuation
- Calibrating to the origination price anchors the mark to something real, which is the difference between a defensible Level 3 valuation and an analyst’s standalone estimate.
- Because every later move in the spread is tied to a recorded driver, the mark carries its own audit trail — a committee or auditor can see why it changed, not just that it did.
Related
Glossary terms
On markst
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