Marks vs Markets: When Credit’s Confidence Game Ends
High yields, tightening liquidity, and one $10 billion bankruptcy are forcing credit investors to face what their marks are really worth.
The Foundation Is Cracking
Private credit depends on trust. Public markets are beginning to show what happens when that trust weakens. Managers mark their portfolios based on internal models. Banks use similar methods. But models only work in stable conditions, and conditions are no longer stable.
Refinancing windows are narrowing. The policy rate remains near 5.25 percent. Borrowers are paying real money again. Spreads on single-B loans have widened about 80 basis points since June. This is the first genuine real-rate test for credit markets in more than a decade, and it is exposing how far theoretical values can drift from prices that actually clear.
Framework: Marks versus Markets
Valuation in credit is always an estimate. Internal marks are built from discounted-cash-flow models and exit assumptions. Market prices are built from real trades. The distinction matters little when liquidity is abundant, but it becomes decisive when liquidity dries up.
The collapse of First Brands Group in late September 2025 revealed that gap in full. The company, a typical private-equity-backed auto-parts borrower, filed for Chapter 11 in the Southern District of Texas with more than $10 billion in liabilities and about $2.3 billion of off-balance-sheet financing. Twenty-three BDCs and direct-lending vehicles reported exposure in their second-quarter filings.
One large BDC still valued its holdings at roughly 100 cents on the dollar. Another, more conservative peer, carried the same debt at 91 cents.1 Both held identical loans. One was marking reality, the other marking hope.
Managers often claim that internal marks reflect long-term fundamentals rather than short-term market sentiment. The First Brands bankruptcy showed the danger in that logic. When liquidity contracts, optimism is not a valuation method.
When the Model Meets the Market
First Brands was not unusual. It was the kind of borrower found across thousands of private-credit portfolios. When it defaulted, theoretical values turned into cash outcomes. Lenders who had already marked down their loans absorbed manageable losses. Those who relied on models took the full hit in one quarter.
The episode exposed something deeper than poor underwriting. The mix of off-balance-sheet financing and inconsistent valuation policies made it impossible to know which investors were truly at risk until the bankruptcy filings appeared.
What Public Markets Are Signaling
Listed BDCs have already adjusted. As of mid-October, about 80 percent trade below their stated NAVs, with median discounts between 15 and 22 percent. That pricing is a collective risk assessment from investors who no longer accept stated book values at face value.
Private credit still operates behind closed doors. Investors receive quarterly reports rather than live pricing. Both buyer and seller can believe they are right because there is no transparent clearing price. Public marks hurt sooner but correct faster. Private marks delay the recognition.
The Enduring Value of Senior Credit
Credit cycles are unavoidable. Seniority still determines who survives them.
Moody’s and S&P data show that senior-secured loans recover on average 60 to 75 percent of face value, compared with roughly 30 percent for subordinated debt and little or nothing for equity.
For income investors, these periods of repricing are not threats but tests of conviction. When senior-secured assets trade at real discounts while equities remain priced for optimism, those yields deserve attention. These prices may not signal panic; they often reveal the opportunity that uncertainty creates.
Takeaways for Investors
Valuations built on internal models remain untested until cash flow proves them. The space between a mark and a market price defines both risk and opportunity.
Discounts are information. A BDC or credit fund trading 15 to 22 percent below NAV reflects the market’s demand for a margin of safety.
Reinvestment is the engine. Lower prices raise forward yield and accelerate compounding, the central discipline of the PYE strategy.
Check the credibility of NAVs. A discount matters only if the NAV behind it is real. Evaluate manager transparency, historical recovery, and leverage policy.
Acquire assets where trust has broken but cash flow endures. That is where sentiment and value diverge, and where durable returns begin.