Credit & Structured Products

When this practice applies

Mark-to-fair-value of Level 3 quotas is demanded by fiduciary administrators to comply with CVM 175 and by fund auditors in annual review. Private credit and structured debt engagements are typically contracted by financial institutions holding the instruments.

• Mark-to-fair-value of Level 3 quotas in FIDCs and securitized structures with illiquid underlyings, for fund quota purposes and quotaholder financial statements.
• Private credit: debentures, real estate certificates (CRI), agribusiness certificates (CRA), commercial notes, under CPC 48 with amortized cost or FVTPL measurement depending on classification.
• Debt restructuring with qualitative test (10% test) analysis to determine whether there is substantial modification and need to derecognize the original instrument.
• Debt issued with equity component: convertible debentures, perpetuals with call options, hybrid instruments, with separation of components under CPC 39 / IAS 32.
• Hedge accounting: designation, effectiveness, prospective and retrospective tests under CPC 48, with full documentation required by the standard.
• FIDC with receivables collateral: modeling of PDD, prepayment, effective average term, and default curve by vintage.
• NPLs and non-performing loan portfolios: valuation by expected recovery model, with recovery rate curves calibrated by vintage, batch, and collateral type.
• Institutional investments with Level 3 quotas in funds-of-funds, family offices, and insurance companies requiring independent pricing.

Approaches by fund type

The economic nature of the underlying asset determines the dominant methodology. There is no single formula: each class requires specific calibration and explicit justification in the report.

Technical procedure

The procedure below is applied to mark-to-fair-value engagements of Level 3 quotas. In recurring engagements, steps 1 to 3 are performed in the inaugural mandate and reviewed annually; steps 4 to 8 are executed at each marking date.

1. Analysis of fund structure

   Full reading of the regulation, investment policy, quota class structure, waterfall, management and performance fees, and any subordination or preference clauses between classes.

2. Identification of material portfolio assets

   Mapping of all assets held by the fund, with classification by type (equity, debt, derivative, real estate, receivable) and materiality relative to total net assets.

3. Methodology definition by asset class

   For each identified class, explicit definition of applied methodology and required inputs. For assets with active market (Level 1), use of observable price. For Level 2/3, justified model with documented inputs.

4. Data collection and validation

   Investee financial statements, material contracts, market data (curves, volatilities, comparables), fund statements, and movements since the last marking date.

5. Individual asset valuation

   Application of defined methodology to each material asset. For immaterial assets, simplified approach: last transaction, amortized cost, or declared NAV with justification.

6. Fund NAV construction

   Sum of asset fair values, deduction of liabilities (expenses, management fee due, accrued performance fee), application of waterfall when there are distinct quota classes, and calculation of fair value per quota.

7. Sensitivity analysis

   Sensitization on critical drivers of each class: discount rate, default curve, cap rate, volatility. Documentation of acceptable range and justified central point.

8. Working papers, report, and technical defense

   Working papers archived for seven years, formal report under CPC 48 / IFRS 9 and CVM 175 standard, and availability for review by administrator, fund auditor, and institutional quotaholder.

Areas of attention

Marking Level 3 quotas is the area with the highest volume of recurring review in the Brazilian market: fiduciary administrators bear primary responsibility and require complete documentation.

• Level 2 vs. Level 3 classification

  The CPC 46 / IFRS 13 hierarchy determines required disclosure and review. Reclassifying Level 3 to Level 2 without methodological justification: using comparable trades instead of a model: is a classic red flag for the auditor.

• Default curve in FIDC

  PDD calculated based on regulatory provision (Resolution 2.682 of the Central Bank) is insufficient for fair value marking under IFRS 9, which requires expected credit loss over total horizon. Vintage curves with empirical calibration are required in critical engagements.

• Recovery rate in NPLs and non-performing portfolios

  NPL valuation without empirical recovery rate calibration by vintage, batch and collateral type understates material error. The recovery curve must be calibrated with the originator's own historical data or documented sector benchmarks.

• Declared NAV vs. calculated fair value reconciliation

  Material divergence between NAV declared by the administrator and fair value calculated by independent appraiser signals a methodological problem: on either side: and requires explicit treatment in the report.

• Subordination in FIDCs and structured CRIs

  In structures with senior and subordinated tranches, the fair value of each class depends on the payment waterfall and the probability of subordination erosion. Applying the same discount rate to both classes is a recurring technical error.

• Discount rate in private credit

  Marking corporate debentures by the DI curve without issuer-specific credit spread adjustment is a clear technical deficiency. The rate must incorporate duration, rating, collateral, and liquidity premium of the instrument.

Applicable standards

Representative cases

Mark-to-fair-value engagements of Level 3 quotas and financial instruments conducted by the CBG team.

Lead team