A 19% NAV write‑down at a leading private credit fund poses a sharp question: When and why do private credit values move? This piece demystifies debt valuation’s drivers—risk‑free rates, credit spreads, and duration—and shows how small base‑rate shifts can create meaningful price changes, even without defaults or rating moves. If you allocate to private credit or rely on it for stability, grasp how volatility is priced into loans today, and how it shapes fair value tomorrow. Explore how rate and spread dynamics interact, what duration amplifies, and how to separate transient noise from durable signals.

Volatility and Value in Debt (How Private Credit Valuations Work)

Private credit values do not typically change significantly between measurement dates, all other economic conditions being equal. Changes in drivers of value (e.g., interest rates, call premia, repayment time horizons) are typically small. The recent 19% NAV write-down of BlackRock TCP can be viewed as an exception to most investor experiences within the asset class.

Generally speaking, changes in market interest rates drive most of any change in the price of debt. The degree of that price change is based on changes in interest rates and will depend upon that security’s remaining duration. Putting aside changes in synthetic ratings and defaults, when we think about value volatility in private credit, we most often think about changes in price as a function of the change in interest rates as a whole. It’s important to understand which private credit value drivers are subject to volatility when valuing debt because the general concept for debt is that higher volatility expectations today lead to higher interest rates and increased default risks over a holding period, and therefore lower fair values today. 

Interest Rates 101: Risk‑Free Rates vs. Credit Spreads

First, let’s examine interest rates, which are most commonly split between a risk-free rate and a credit spread. Both rates reflect volatility differently. In the United States, the Federal Reserve’s monetary policy (linked to expected domestic economic conditions), as well as market participant expectations of that future policy, are the primary drivers of changes in Treasury prices (and by extension rates) which are considered the “risk-free rate” in the US for valuation discounting purposes. Most floating rate debt in the US references the Secured Overnight Financing Rate (SOFR – the cost of overnight borrowing by US banks in the repo market) as collateralized by Treasury securities. Changes in Treasury rates and in turn SOFR occur as a reflection of US domestic monetary policy. Measured volatility in base rates will be minimal provided monetary policy is viewed as stable. 

Interpreting Rate and Spread Dynamics in Private Credit

As a result, when we talk about risk-free interest rate volatility we are typically referring to changes in interest rates due to supply and demand of government securities as a whole and the risk and reward associated with purchasing a government-backed security. If volatility is higher for US Treasury securities it typically means there is more uncertainty with how the US economy is responding, or will respond, to current monetary policy. So private credit investors are typically focused on volatility pricing of Treasury securities themselves versus volatility driven by the Federal Reserve.

Second, let’s explore volatility in market (or “credit”) spreads. Volatility in market spreads will be a reflection of how investors perceive risks specific to borrowers and how they may be individually impacted by, and respond to, expected future economic conditions, as well as competition amongst lenders for loan placements, which is simply the supply and demand of capital. Although there is undoubtedly a relationship between risk-free rates and credit spreads, credit spreads increase and decrease based on a company’s idiosyncratic performance relative to the economy as a whole, as well as the overall supply of capital for new loans, which has increased dramatically over the past several years.

We typically see higher volatility in credit spreads for those companies that have higher risk profiles, and credit ratings (actual or synthetic) are an attempt to measure those risk profiles. For example, if Company X has AA rated debt, we would typically see less volatility in its credit spread than Company Y that has B rated debt. A lot can be derived from this relationship, but the simple implication is that Company X will be better positioned to pay back its debt regardless of what changes occur in the broader economy. For this reason, there is less uncertainty with the value of Company X’s debt and by extension there will be less volatility in its price.

Duration’s Impact on Private Credit Pricing

It is also helpful to explore the concept of duration. Duration is an amplifier of interest rate risk. In isolation, it reflects the sensitivity of the price of debt to changes in interest rates over time. The longer the duration of a given debt instrument, the greater the impact of changes in interest rates. For example, Company X has debt with a 5-year duration. The price of that debt will decrease by slightly more than 5% for every 1% increase in interest rates. Company B has debt with a 7-year duration. The price of that debt will decrease by slightly more than 7% for every 1% increase in interest rates.

There are a lot more layers to duration, but it is important to understand the basics when we talk about credit market volatility and how that translates to individual loans. Volatility is a measure of the magnitude of price fluctuation, and different ranges of volatility can exist for any given value driver when evaluating a specific debt security. Duration determines the magnitude of price volatility (as we observe in the publicly traded bond market). Interest rates demonstrate volatility in both the risk-free and credit spreads that comprise an all-in rate, and which may separately vary in their volatility. Investors need to be aware of these concepts, their individual impact, and explore the greater intricacies of these relationships when contemplating debt valuations.

How A&M Can Help Private Credit Investors

A&M is an expert in private credit valuations, delivering thousands of performing and non-performing valuations every year, with a dedicated team of over 250 valuation professionals globally, across North America, South America, Europe, Asia, and Australia. Contact us at  www.alvarezandmarsal.com.