[Federal Register Volume 59, Number 105 (Thursday, June 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13322]


[[Page Unknown]]

[Federal Register: June 2, 1994]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 107

[FR Doc. 94-7844]

 

Small Business Investment Companies; Valuation Guidelines; 
Correction

AGENCY: Small Business Administration.

ACTION: Final rule; correction.

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SUMMARY: SBA is correcting the presentation of certain information 
concerning valuation guidelines which was included in the final rule 
published in the Federal Register on April 8, 1994 (59 FR 16933). 
Certain paragraphs were not printed in bold type as intended.

EFFECTIVE DATE: April 25, 1994.

FOR FURTHER INFORMATION CONTACT:
Saunders Miller, Senior Policy Advisor, Investment Division; Telephone 
(202) 205-6510.

SUPPLEMENTARY INFORMATION: On April 8, 1994, SBA published a final rule 
(59 FR 16933) which included the addition of a new appendix III to part 
107 of title 13 of the Code of Federal Regulations. The appendix sets 
forth valuation guidelines for Small Business Investment Companies 
(Licensees). In Section III of appendix III, it was SBA's intention to 
have certain paragraphs printed in bold type and other paragraphs 
printed in regular type. Bold type was intended to identify a model 
valuation policy which could be adopted verbatim by Licensees, while 
regular type was intended to identify supplementary information which 
would assist Licensees in interpreting and applying the model policy. 
When the final rule was printed, however, none of the text in Section 
III appeared in bold type.
    In order to allow Licensees to distinguish between the model 
valuation policy and the supplementary information, SBA is publishing a 
reorganized version of appendix III. Section III of the reorganized 
appendix is retitled ``Model Valuation Policy'' and includes only those 
paragraphs originally intended to be printed in bold type. A new 
Section IV is entitled ``Valuation Policy With Supplementary 
Information'' and contains both the model and supplementary paragraphs 
with no difference in type face. An explanation of the difference 
between Sections III and IV, and how each may be used by Licensees, is 
provided in paragraphs H. and I. of Section II of the appendix.
    In FR Doc. 94-7844, published in the Federal Register on Friday, 
April 8, 1994, appendix III of 13 CFR part 107 is corrected to read as 
follows:

Appendix III To Part 107--Valuation Guidelines for SBICs

I. Introduction

    This appendix describes the policies and procedures to which 
Licensees (SBICs and SSBICs) must conform in valuing their Loans and 
Investments and provides guidance as to the techniques and standards 
which are generally applicable to such valuations.
    The need for clearly defined valuation policies and procedures 
and understandable techniques arises in connection with the 
requirement that Licensees report the worth of their portfolios to 
investors and SBA. This information assists SBA in its assessment of 
the overall operational performance and financial condition of 
individual Licensees and of the industry.

II. Overall Guidelines

A. Definitions

    1. Asset Value means the amount that the general partners or 
board of directors of a Licensee have established as a current value 
in accordance with its Valuation Policy.
    2. Marketable Securities means securities for which market 
quotations are readily available and the market is not ``thin'', 
either in absolute terms, or relative to the potentially saleable 
holdings of the Licensee and other investors with saleable blocks of 
such securities. These securities are valued as follows: (a) For 
over-the-counter stocks, taking the average of the bid price at the 
close for the valuation date and the preceding two days, and (b) for 
listed stocks, taking the average of the close for the valuation 
date and the preceding two days. This classification does not 
include securities which are subject to resale restrictions, either 
under securities laws or contractual agreements, although other 
securities of the same class may be freely marketable.
    3. Other Securities means all Loans and Investments not defined 
in paragraph A.(2) of this section. Such securities shall be valued 
at Asset Value. Most SBIC and SSBIC investments will fall in this 
classification.
    4. Valuation Policy means the official document of a Licensee 
that definitively sets forth the Licensee's methods of valuing Loans 
and Investments in accordance with the requirements of Sec. 101(g) 
and this appendix.

B. Objective

    The goal of a Licensee's valuation process is to value its Loans 
and Investments. However, the very nature of Licensees' investments 
sometimes makes the determination of fair market value 
problematical. In most cases there is no market for the investment 
at the time of valuation. Therefore, except where market quotations 
are readily available and the markets are not ``thin'', the Boards 
of Directors or General Partners are necessarily responsible for 
determining in good faith the value of Loans and Investments.
    Determination of value will depend upon the circumstances in 
each case. No exact formula can be devised that will be generally 
applicable to the multitude of different valuation issues that will 
arise. This is especially true for semiannual valuation updates of 
relatively new investments for which current results either exceed 
or do not meet the Small Concern's forecasts. A sound valuation 
should be based upon all of the relevant facts, with common sense 
and informed judgement influencing the process of weighing those 
facts and determining their significance in the aggregate.

C. General Considerations

    The Asset Value of Loans and Investments will depend upon the 
circumstances of each individual case and will be based upon the 
nature of the asset and the stage of a company's existence.
    In negotiating the terms and conditions of an investment with a 
Small Concern, the Licensee, in effect, establishes an initial 
valuation for the investment, which is cost. Cost shall be the Asset 
Value until there is a basis to increase or decrease the valuation.
    Unrealized appreciation should be recognized when warranted, but 
should be limited to those investments that have a sustained 
economic basis for an increase in value. Temporary market 
fluctuations or a temporary increase in earnings should not be the 
cause or sole reason for appreciation.
    Unrealized depreciation should be recorded when portfolio 
companies show sustained unfavorable financial performance. 
Continuous close scrutiny of Loans and Investments will provide 
insight into the business cycles and problems encountered by small 
business concerns. This insight will allow the Licensee to 
differentiate between a temporary downturn or setback and a long-
term problem indicating a measurable decline in Asset Value.
    When a decline in Asset Value appears permanent, a complete or 
partial write-off of the asset (i.e., recording a realized loss 
rather than unrealized depreciation) should occur. Some of the more 
obvious indications of permanent impairment of an investment include 
the termination of business operations, a petition for bankruptcy 
protection or liquidation, or the absence of a verifiable forwarding 
address of the business or its proprietor(s). Less obvious 
situations may include the loss of major revenue accounts, the shut 
down of a critical distribution channel, an adverse legal or 
regulatory ruling, or the expiration of a priority claim on 
collateral in a distressed Small Concern. These and other possible 
circumstances should be assessed on a case-by-case basis, with 
supporting documentation on file.

D. Valuation Responsibility

    As specified in 13 CFR 107.101(g), the Licensee's Board of 
Directors or General Partners have the sole responsibility for 
determining Asset Value. In determining Asset Value, the Board of 
Directors or General Partners must satisfy themselves that all 
appropriate factors relevant to a good faith valuation have been 
considered and that the methods used are reasonable and prudent and 
are consistently applied. Although the Board of Directors or General 
Partners have the ultimate responsibility for determining Asset 
Value, they may appoint management or other persons to assist them 
in such determinations and to provide supporting data and make the 
necessary calculations pursuant to the Board's or General Partners' 
direction. It is essential that a careful, conservative, yet 
realistic approach be taken by Licensees in determining the Asset 
Value of each Loan and Investment.
    As part of the annual audit of the Licensee's financial 
statements, the Licensee's independent public accountant has 
responsibility to review the Licensee's valuation procedures and 
implementation of such procedures including adequacy of 
documentation. The independent public accountant also has reporting 
responsibility regarding the results of this review. (See appendix I 
to this part, section III and section V, paragraphs I and J).

E. Frequency of Valuation

    Loans and Investments shall be valued individually and in the 
aggregate by the Board of Directors or General Partners at least 
semiannually--as of the end of the second quarter of Licensee's 
fiscal year and as of the end of Licensee's fiscal year, Provided 
however, That Licensees without Leverage need only perform 
valuations once a year. On a case-by-case basis, SBA may require 
valuations to be made more frequently. Only valuations performed as 
of the fiscal year-end are required to be reviewed by the Licensee's 
independent public accountant, as discussed in paragraph D. of this 
section. Each Licensee shall forward a valuation report to SBA 
within 90 days of the end of its fiscal year in the case of annual 
valuations, and within thirty days following the close of other 
reporting periods. Material changes in valuations shall be reported 
not less often than quarterly within thirty days following the close 
of the quarter. Since the valuations will only be as sound as the 
timeliness of the financial information upon which they are based, 
Licensees shall require frequent financial statements from Small 
Concerns. Monthly financial statements are normally appropriate.

F. Written Valuation Policy

    Each Licensee shall establish a written Valuation Policy 
approved by its Board of Directors or General Partners that includes 
a statement of policies and procedures that are consistent with 
Section III of this appendix.

G. Documentation

    Each Licensee shall prepare and retain in its permanent files a 
valuation report as of each valuation date documenting, for each 
portfolio security, the cost, the current Fair Value and the 
previous Fair Value, plus the methodology and supporting data used 
to determine the value of each such portfolio security. The minutes 
of meetings of Boards of Directors or General Partners at which 
valuations are determined will contain a resolution confirming that 
the valuations of each portfolios security were determined in 
accordance with Licensee's duly adopted valuation procedures and 
will incorporate by reference the valuation report signed by each 
Director or General Partner along with any dissenting valuation 
opinions.

H. Instructions

    A model Valuation Policy is presented in Section III below. 
Licensees may adopt the model in its entirety or make appropriate 
modifications, additions or deletions. Any changes, however, must be 
generally consistent with the model.
    A second version of the model Valuation Policy is presented in 
Section IV. This section repeats the language of Section III, but is 
expanded to include additional explanatory paragraphs. These 
paragraphs are commentary provided by SBA to assist Licensees in 
interpreting and applying some of the model valuation criteria. They 
may be adapted for inclusion in the Licensee's Valuation Policy, if 
desired.

I. Approval

    1. Any Licensee that utilizes the exact wording of Section III, 
without any additions, deletions, or changes will be presumed to 
have an acceptable Valuation Policy. It is acknowledged, however, 
that this wording may not be entirely applicable to all Licensees. 
If a Licensee wants to adopt a Valuation Policy that is different 
from Section III, the Licensee must obtain SBA's written approval of 
such Policy. If changes from the wording of Section III are minor, 
it is suggested that the Licensee indicate deletions with a caret 
() and underline additions.
    2. Applicants for either a Section 301(c) or 301(d) license must 
submit their Valuation Policies for approval as part of the 
licensing application process.

III. Model Valuation Policy

A. General

    1. The [Board of Directors] [General Partners] have sole 
responsibility for determining the Asset Value of each of the Loans 
and Investments and of the portfolio in the aggregate.
    2. Loans and Investments shall be valued individually and in the 
aggregate [at least semi-annually--as of the end of the second 
quarter of the fiscal year and as of the end of the fiscal year.] 
[at least annually--as of the end of the fiscal year.] Fiscal year-
end valuations are audited as set forth in 13 CFR Part 107 Appendix 
III, Section II, paragraph D.
    3. This Valuation Policy is intended to provide a consistent, 
conservative basis for establishing the Asset Value of the 
portfolio. The Policy presumes that Loans and Investments are 
acquired with the intent that they are to be held until maturity or 
disposed of in the ordinary course of business.

B. Interest-Bearing Securities

    1. Loans shall be valued in an amount not greater than cost, 
with Unrealized Depreciation being recognized when value is 
impaired. The valuation of loans and associated interest receivables 
on interest-bearing securities should reflect the portfolio 
concern's current and projected financial condition and operating 
results, its payment history and its ability to generate sufficient 
cash flow to make payments when due.
    2. When a valuation relies more heavily on asset versus earnings 
approaches, additional criteria should include the seniority of the 
debt, the nature of any pledged collateral, the extent to which the 
security interest is perfected, the net liquidation value of 
tangible business assets, and the personal integrity and overall 
financial standing of the owners of the business. In those instances 
where a loan valuation is based on an analysis of certain 
collateralized assets of a business or assets outside the business, 
the valuation should, at a minimum, consider the net liquidation 
value of the collateral after reasonable selling expenses. Under no 
circumstances, however, shall a valuation based on the underlying 
collateral be considered as justification for any type of loan 
appreciation.
    3. Appropriate unrealized depreciation on past due interest 
which is converted into a security (or added to an existing 
security) should be recognized when collection is doubtful. 
Collection is presumed to be in doubt when one or both of the 
following conditions occur: (i) Interest payments are more than 120 
days past due; or (ii) the small concern is in bankruptcy, 
insolvent, or there is substantial doubt about its ability to 
continue as a going concern.
    4. The carrying value of interest-bearing securities shall not 
be adjusted for changes in interest rates.
    5. The valuation of convertible debt may be adjusted to reflect 
the value of the underlying equity security net of the conversion 
price.

c. Equity Securities--Private Companies

    1. Investment cost is presumed to represent value except as 
indicated elsewhere in these guidelines.
    2. Valuation should be reduced if a company's performance and 
potential have significantly deteriorated. If the factors which led 
to the reduction in valuation are overcome, the valuation may be 
restored.
    3. The anticipated pricing of a Small Concern's future equity 
financing should be considered as a basis for recognizing Unrealized 
Depreciation, but not for Unrealized Appreciation. If it appears 
likely that equity will be sold in the foreseeable future at a price 
below the Licensee's current valuation, then that prospective 
offering price should be weighed in the valuation process.
    4. Valuation should be adjusted to a subsequent significant 
equity financing that includes a meaningful portion of the financing 
by a sophisticated, unrelated new investor. A subsequent significant 
equity financing that includes substantially the same group of 
investors as the prior financing should generally not be the basis 
for an adjustment in valuation. A financing at a lower price by a 
sophisticated new investor should cause a reduction in value of 
prior securities.
    5. If substantially all of a significant equity financing is 
invested by an investor whose objectives are in large part 
strategic, or if the financing is led by such an investor, it is 
generally presumed that no more than 50% of the increase in 
investment price compared to the prior significant equity financing 
is attributable to an increased valuation of the company.
    6. Where a company has been self-financing and has had positive 
cash flow from operations for at least the past two fiscal years, 
Asset Value may be increased based on a very conservative financial 
measure regarding P/E ratios or cash flow multiples, or other 
appropriate financial measures of similar publicly-traded companies, 
discounted for illiquidity. Should the chosen valuation cease to be 
meaningful, the valuation may be restored to a cost basis, or in the 
event of significant deterioration in performance or potential, to a 
valuation below cost to reflect impairment.
    7. With respect to portfolio companies that are likely to face 
bankruptcy or discontinue operations for some other reason, 
liquidating value may be employed. This value may be determined by 
estimating the realizable value (often through professional 
appraisals or firm offers to purchase) of all assets and then 
subtracting all liabilities and all associated liquidation costs.
    8. Warrants should be valued at the excess of the value of the 
underlying security over the exercise price.

D. Equity Securities--Public Companies

    1. Public securities should be valued as follows: (a) For over-
the-counter stocks, take the average of the bid price at the close 
for the valuation date and the preceding two days, and (b) for 
listed stocks, take the average of the close for the valuation date 
and the preceding two days.
    2. The valuation of public securities that are restricted should 
be discounted appropriately until the securities may be freely 
traded. Such discounts typically range from 10% to 40%, but the 
discounts can be more or less, depending upon the resale 
restrictions under securities laws or contractual agreements.
    3. When the number of shares held is substantial in relation to 
the average daily trading volume, the valuation should be discounted 
by at least 10%, and generally by more.

IV. Valuation Policy With Supplementary Information

A. General

    1. The [Board of Directors] [General Partners] have sole 
responsibility for determining the Asset Value of each of the Loans 
and Investments and of the portfolio in the aggregate.
    2. Loans and Investments shall be valued individually and in the 
aggregate [at least semi-annually--as of the end of the second 
quarter of the fiscal year and as of the end of the fiscal year.] 
[at least annually--as of the end of the fiscal year.] Fiscal year-
end valuations are audited as set forth in 13 CFR Part 107, Appendix 
III, Section II, paragraph D.
    3. This Valuation Policy is intended to provide a consistent, 
conservative basis for establishing the Asset Value of the 
portfolio. The Policy presumes that Loans and Investments are 
acquired with the intent that they are to be held until maturity or 
disposed of in the ordinary course of business.

B. Interest-Bearing Securities

    1. Loans shall be valued in an amount not greater than cost, 
with Unrealized Depreciation being recognized when value is 
impaired. The valuation of loans and associated interest receivables 
on interest-bearing securities should reflect the portfolio 
concern's current and projected financial condition and operating 
results, its payment history and its ability to generate sufficient 
cash flow to make payments when due.
    2. When a valuation relies more heavily on asset versus earnings 
approaches, additional criteria should include the seniority of the 
debt, the nature of any pledged collateral, the extent to which the 
security interest is perfected, the net liquidation value of 
tangible business assets, and the personal integrity and overall 
financial standing of the owners of the business. In those instances 
where a loan valuation is based on an analysis of certain 
collateralized assets of a business or assets outside the business, 
the valuation should, at a minimum, consider the net liquidation 
value of the collateral after reasonable selling expenses. Under no 
circumstances, however, shall a valuation based on the underlying 
collateral be considered as justification for any type of loan 
appreciation.
    3. Appropriate unrealized depreciation on past due interest 
which is converted into a security (or added to an existing 
security) should be recognized when collection is doubtful. 
Collection is presumed to be in doubt when one or both of the 
following conditions occur: (i) Interest payments are more than 120 
days past due; or (ii) the small concern is in bankruptcy, 
insolvent, or there is substantial doubt about its ability to 
continue as a going concern.
    a. Licensees may rebut this presumption by providing evidence of 
collectibility satisfactory to SBA. Such evidence may include the 
existence of collateral, the value of which has been verified 
through an appraisal by an independent professional appraiser 
acceptable to SBA. Such an appraisal shall be at liquidation value 
(net of liquidation costs) and shall have been performed within the 
12 months immediately preceding the valuation date. In considering 
whether collateral provides an appropriate basis for valuations, SBA 
will review the Licensee's operating history for evidence concerning 
its willingness and ability to pursue available remedies (including 
foreclosure) in default situations.
    b. For those Licensees primarily involved in making loans, the 
use of a loan classification system is strongly encouraged to help 
manage portfolios and determine Asset Values, with loans that 
warrant extra attention being flagged by the Licensee's management. 
Such a ``watch list'' can also be used to report to the Board of 
Directors or General Partner(s). For each loan placed on the watch 
list, a reason or statement should describe the particular 
situation. Danger signals that should alert the Licensee to 
potential problems include delinquency, a lack of profitability, 
weak or decreasing equity, increasing debt load, a deteriorating 
cash position, an abnormal increase in accounts payable, inaccurate 
financial information, insurance cancellation, judgments and tax 
liens, family problems, loss of employees, collateral problems, 
slowdown in inventory turnover, poor maintenance of plant and 
equipment, and heavy reliance on short term debt.
    c. Upon careful consideration of all the relevant factors, the 
Board of Directors or General Partners shall determine which loans 
require recognition of Unrealized Depreciation. It is a good rule of 
operation for a Licensee to perform downward valuations earlier 
rather than later. When the quality of a loan recovers, a higher 
Asset Value may subsequently be assigned.
    4. The carrying value of interest-bearing securities shall not 
be adjusted for changes in interest rates.
    5. The valuation of convertible debt may be adjusted to reflect 
the value of the underlying equity security net of the conversion 
price.
    a. Accepted methods for valuing convertible debentures generally 
involve one of two approaches. The first approach views the 
debenture as a debt obligation. Under this approach, the Licensee 
should utilize the loan valuation techniques described in this 
section above. The second approach considers the conversion of all 
convertible securities of the same class into their common stock 
equivalent, taking into account dilution, and a subsequent valuation 
of the Licensee's proportionate equity interest. Valuation of this 
equity interest should follow the equity valuation techniques 
described in Paragraph C. of this section.
    b. Normally, the reported value is the higher of these two 
alternatives. However, Licensees should disregard higher equity 
values and retain lower debt-based valuations if there are 
circumstances which make conversion undesirable. When equity 
considerations govern the Asset Value assigned, all underlying 
factors should be disclosed.

C. Equity Securities--Private Companies

    1. Investment cost is presumed to represent value except as 
indicated elsewhere in these guidelines.
    2. Valuation should be reduced if a company's performance and 
potential have significantly deteriorated. If the factors which led 
to the reduction in valuation are overcome, the valuation may be 
restored.
    3. The anticipated pricing of a Small Concern's future equity 
financing should be considered as a basis for recognizing Unrealized 
Depreciation, but not for Unrealized Appreciation. If it appears 
likely that equity will be sold in the foreseeable future at a price 
below the Licensee's current valuation, then that prospective 
offering price should be weighed in the valuation process.
    4. Valuation should be adjusted to a subsequent significant 
equity financing that includes a meaningful portion of the financing 
by a sophisticated, unrelated new investor. A subsequent significant 
equity financing that includes substantially the same group of 
investors as the prior financing should generally not be the basis 
for an adjustment in valuation. A financing at a lower price by a 
sophisticated new investor should cause a reduction in value of 
prior securities.
    5. If substantially all of a significant equity financing is 
invested by an investor whose objectives are in large part 
strategic, or if the financing is led by such an investor, it is 
generally presumed that no more than 50% of the increase in 
investment price compared to the prior significant equity financing 
is attributable to an increased valuation of the company.
    6. Where a company has been self-financing and has had positive 
cash flow from operations for at least the past two fiscal years, 
Asset Value may be increased based on a very conservative financial 
measure regarding P/E ratios or cash flow multiples, or other 
appropriate financial measures of similar publicly-traded companies, 
discounted for illiquidity. Should the chosen valuation cease to be 
meaningful, the valuation may be restored to a cost basis, or in the 
event of significant deterioration in performance or potential, to a 
valuation below cost to reflect impairment.
    a. Under these conditions, valuation factors that may be 
considered include:
    (1) The utilization of a multiple of earnings, cash flow, or 
revenues, which are commensurate with the multiples which the market 
currently accords to comparable companies in similar businesses and 
industries, with an appropriate discount for conditions such as 
illiquidity or a minority position. Care should be taken to use only 
comparable companies, including not only business similarities but 
also similarities as to size, financial condition, and earnings 
outlook. However, in order for comparative market prices to be 
meaningful, data for a representative sample of similar companies 
must be available.
    (2) Among the more important factors to be considered in a 
particular case are (i) the nature of the business, (ii) the risk 
involved, and (iii) the growth, stability or irregularity of 
earnings and cash flows. A company with a positive earnings trend 
and a favorable outlook may command a capitalization factor 
(multiplier) in the marketplace that will result in a stock 
valuation well above book value. When the gross value of a small 
concern is computed by applying a capitalization rate to pre-
interest, pre-tax earnings, the value of equity securities is 
derived by subtracting the outstanding debt of the concern from the 
gross value. While capitalization rates do vary, an appropriate rate 
can be determined by analyzing rates for comparable companies in the 
same industry. Investigating similar companies in the same industry 
or geographic area can be done directly or through published 
material from sources such as the Value Line, Standard and Poor's, 
Robert Morris and Associates, or any other of the numerous sources 
available for comparative industry data.
    (3) Another method discounts the present value of estimated 
future proceeds to a Licensee, including dividend income and sales 
of securities, using a discount rate that reflects the degree of 
risk of the equity interest.
    (4) One may also utilize the recent sale prices of comparable 
blocks of the issuer's securities in arm's length transactions.
    b. Equity interests or limited partnership interests without the 
benefit of stock certificates and which generally define a certain 
percentage of the profits to be allocated to each of the investors 
based on its relative contributions should be valued in a manner 
similar to the valuation methods described in this section.
    7. With respect to portfolio companies that are likely to face 
bankruptcy or discontinue operations for some other reason, 
liquidating value may be employed. This value may be determined by 
estimating the realizable value (often through professional 
appraisals or firm offers to purchase) of all assets and then 
subtracting all liabilities and all associated liquidation costs.
    a. Liquidation value will depend on the decreasing value of 
wasting assets, the costs experienced by the business being 
liquidated, the expenses borne by the Licensee in order to be able 
to realize any liquidating value, the elapsed time until such net 
proceeds can be realized, the ranking of the Licensee's claims 
relative to other security interests and subordination agreements, 
and the probability of any ultimate realization of value.
    b. Incorporating this approach as a normal step in valuation can 
provide improved understanding of the downside of an investment.
    c. Licensees should recognize unrealized appreciation or 
depreciation, as appropriate, on Assets Acquired in Liquidation of 
Loans and Investments. In order to recognize Unrealized 
Appreciation, asset values must be verified by an appraisal which 
meets all the conditions specified in the preceding paragraph; 
Provided, however, that if the assets acquired constitute a going 
concern, such assets may be appraised as a going concern rather than 
at liquidation value. Unrealized Appreciation may not be recognized 
if the Licensee does not benefit from such appreciation. For 
example, an asset acquired through foreclosure should not be carried 
at a value greater than the defaulted loan balance plus any expenses 
and penalties to which the Licensee is entitled.
    8. Warrants should be valued at the excess of the value of the 
underlying security over the exercise price.
    a. Valuation of debt with detachable warrants can be done 
similarly to convertible debt by treating the debt and warrants as a 
unit, or, alternatively, the debt can be valued on its own basis as 
a debt instrument, and the warrants separately. If the warrants are 
valued separately, the following factors must be taken into account:
    (1) Current value of issued shares.
    (2) The differential between the exercise private and the 
underlying share values if the current share values are higher than 
the exercise price.
    (3) Time until expiration dates are reached or dates of changes 
in terms of exercise prices.
    (4) Number of shares into which the warrants are exercisable on 
various dates.
    (5) Restrictions on sale of the underlying stock.
    (6) Restrictions on the transferability of the warrants.
    (7) Registration rights for the warrants or the underlying 
shares.
    (8) Financial ability of the Licensee to perform the exercise of 
its rights or to sell its warrants.
    (9) The ultimate desirability, if any, of exercising the rights 
given by the warrants.

D. Equity Securities--Public Companies

    1. Public securities should be valued as follows: (a) For over-
the-counter stocks, take the average of the bid price at the close 
for the valuation date and the preceding two days, and (b) for 
listed stocks, take the average of the close for the valuation date 
and the preceding two days.
    a. However, securities are not deemed to be freely marketable in 
those situations where such securities are very thinly or 
infrequently traded, or may be lacking in truly representative 
market quotations, or where the market for such securities cannot 
absorb the quantity of shares which the Licensee and similar 
investors may want to sell.
    b. In such cases, Asset Value must be determined by the Board of 
Directors or General Partners.
    2. The valuation of public securities that are restricted should 
be discounted appropriately until the securities may be freely 
traded. Such discounts typically range from 10% to 40%, but the 
discounts can be more or less, depending upon the resale 
restrictions under securities laws or contractual agreements.
    3. When the number of shares held is substantial in relation to 
the average daily trading volume, the valuation should be discounted 
by at least 10%, and generally by more.

    Dated: May 19, 1994.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-13322 Filed 6-1-94; 8:45 am]
BILLING CODE 8025-01-M