Market value of debt
Valuation & CompsWhat a company's borrowings actually trade at, which can differ sharply from the book value used in a routine bridge.
Also written: fair value of debt
Enterprise value is a market based number, so pairing it with liabilities carried at historic book value mixes two different measurement bases. For recently issued investment grade borrowings the difference is immaterial and nobody argues about it. For debt trading well below par, or long dated fixed rate debt issued into a very different rate environment, it can be large.
The case for using market value is internal consistency: if the market prices a claim at sixty cents in the euro, treating it as a full obligation asserts something the market disagrees with, and the same argument that made you use a live share price applies to the debt.
The counter argument is stronger than most candidates expect and worth being able to state. In a change of control the buyer frequently cannot buy the debt in at its market price, because most European high yield documents include a change of control put at 101 and bank facilities typically require repayment. A discount that exists for a passive holder can evaporate for an acquirer.
The resolution is to say which basis you used and why. Book value is the sensible default for ordinary paper trading near par. Market value belongs in a distressed situation, where the gap between the two is frequently the whole analysis.
Worked example
A company has 500 of bonds at face value, trading at 62, and an equity value of 100.
At book, enterprise value is 600. At market, the bonds are worth 310 and enterprise value is 410. The two imply very different multiples on the same EBITDA.
Which is right depends on the question. For a passive investor pricing the whole capital structure, 410. For a buyer who will trigger a change of control put at 101, closer to 600.