Bangkok--2 Dec--Standard & Poor's
As more companies emerge from bankruptcy after defaulting during 2008 and 2009, Standard & Poor's has put together a clearer picture of the defaults and recoveries from the recent credit downturn, said an article published today by Standard & Poor's Global Fixed Income Research, titled "Recovery Study (U.S.): Piecing Together The Performance Of Defaulted Instruments After The Recent Credit Cycle."
"We believe that ultimate recovery rates have rebounded after hitting a trough during the fourth quarter of 2008 and the first quarter of 2009," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research. "However, we still expect that recovery rates will continue to vary widely, as they have historically, and we don't expect that they will, on average, return to the highs experienced during the heyday of 2006-2007 anytime soon."
From 2008-2010, recovery rates averaged 49.5% across all financial instruments--slightly lower than the average for 1987-2007. We note that ultimate recovery rates (the values of securities when they emerge from default) vary widely around the average and are affected by instrument-, company-, and macroeconomic-level factors. Instrument-level factors include the type of instrument, its seniority within the capital structure, and its collateral type. Company-level factors include the overall capital structure, the debt cushion, and the equity levels. Macroeconomic-level factors include whether the economy is in a boom or a recession, the market liquidity available to fund companies as they emerge from bankruptcy, and the overall default rate. "Within the most recent credit cycle, another variable--distressed exchanges--added a new dimension to our recovery data set because a significant number of companies were able to renegotiate their credit terms through distressed exchanges instead of through more traditional bankruptcies," said Ms. Vazza. From 2008-2010, distressed exchanges on bonds had an average recovery rate of 42%, compared with 30% for post-bankruptcy exit values.
We compare the variance in recovery rates for defaulted instruments by first looking at the position of the instrument within the capital structure. "From 1987 to 2011 (our sample period), default instrument recoveries improved as the instrument's seniority increases within the capital structure," said Ms. Vazza. "The revolving credit facilities, which are typically the most senior instruments, had the highest recovery amount, with 88%, on average, of the defaulted principal amount." Debt cushion, which is the amount of debt below a defaulted instrument, is another variable that affects defaulted instruments' recoveries. The presence of and the quality of the collateral backing a defaulted instrument is also a key variable for analyzing the variance in recovery rates.
The report is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to
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Media Contact:
Mimi Barker, New York (1) 212-438-5054,
[email protected]
Analyst Contacts:
Diane Vazza, New York (1) 212-438-2760