Goldman Sachs 2013 Annual Report Download - page 128

Notes to Consolidated Financial Statements
Valuation Techniques and Significant Inputs
The table below presents the valuation techniques and the
nature of significant inputs. These valuation techniques and
significant inputs are generally used to determine the fair
values of each type of level 3 cash instrument.
Level 3 Cash Instruments Valuation Techniques and Significant Inputs
Loans and securities backed by commercial
real estate
‰Collateralized by a single commercial real
estate property or a portfolio of properties
‰May include tranches of varying levels
of subordination
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses and include:
‰Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral
and the basis, or price difference, to such prices
‰Market yields implied by transactions of similar or related assets and/or current levels and changes in market
indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds)
‰A measure of expected future cash flows in a default scenario (recovery rates) implied by the value of the underlying
collateral, which is mainly driven by current performance of the underlying collateral, capitalization rates and
multiples. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the
benefit of credit enhancements on certain instruments
‰Timing of expected future cash flows (duration) which, in certain cases, may incorporate the impact of other
unobservable inputs (e.g., prepayment speeds)
Loans and securities backed by residential
real estate
‰Collateralized by portfolios of residential
real estate
‰May include tranches of varying levels
of subordination
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses, which incorporate comparisons to
instruments with similar collateral and risk profiles, including relevant indices such as the ABX (an index that tracks the
performance of subprime residential mortgage bonds). Significant inputs include:
‰Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral
‰Market yields implied by transactions of similar or related assets
‰Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation
timelines and related costs
‰Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines
Bank loans and bridge loans Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to
prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt
instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs
include:
‰Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices
such as CDX and LCDX (indices that track the performance of corporate credit and loans, respectively)
‰Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related
cash instrument, the cost of borrowing the underlying reference obligation
‰Duration
Non-U.S. government and agency obligations
Corporate debt securities
State and municipal obligations
Other debt obligations
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to
prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt
instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs
include:
‰Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices
such as CDX, LCDX and MCDX (an index that tracks the performance of municipal obligations)
‰Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related
cash instrument, the cost of borrowing the underlying reference obligation
‰Duration
Equities and convertible debentures (including
private equity investments and investments in
real estate entities)
Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt restructurings) are
considered to be the best evidence for any change in fair value. When these are not available, the following valuation
methodologies are used, as appropriate:
‰Industry multiples (primarily EBITDA multiples) and public comparables
‰Transactions in similar instruments
‰Discounted cash flow techniques
‰Third-party appraisals
‰Net asset value per share (NAV)
The firm also considers changes in the outlook for the relevant industry and financial performance of the issuer as
compared to projected performance. Significant inputs include:
‰Market and transaction multiples
‰Discount rates, long-term growth rates, earnings compound annual growth rates and capitalization rates
‰For equity instruments with debt-like features: market yields implied by transactions of similar or related assets,
current performance and recovery assumptions, and duration
126 Goldman Sachs 2013 Annual Report