Bangkok--26 Nov--Standard & Poor's
Recovery values on a discounted basis fell to 66% in the first three quarters of 2008, down slightly from 72% in 2007 but still well above the historical average of 51%, said an article published today by Standard & Poor's. Meanwhile, nominal recoveries were recorded at 75.4% in the year to date. These settlement values recorded to date fail to reflect the degradation in recovery rates that Standard & Poor's expects to begin next year. In part, the resilience is due to the fact that all but one of the recoveries recorded to date materialized in the first half of the year, when the markets--though less bullish--were not experiencing shocks of the magnitude that they have been since September.
Standard & Poor's believes that recovery values are near the peak of the cycle and that the trend of recovery rates exceeding historical averages will reverse. To offer a comparative perspective from previous down cycles, recoveries averaged 44% during the 1990-1991 recession and 45% during the 2000-2002 contraction, according to the article, titled "U.S. Recovery Study: Swollen Recovery Rates Conceal Underlying Trauma (Premium)."
The study cites receding liquidity and a weakening economy, which will pressure exit valuations for secured and unsecured debt.
"As the near universal recoil in liquidity extends to suppliers of debtor-in-possession financing facilities, the options available to troubled issuers will shrink, potentially resulting in greater liquidations in the near term, which often result when companies cannot get financing to continue operating during bankruptcy," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. The study also cites "complexity in financial structures, the proliferation of loosely covenanted deals, newfangled features like accordions that could compromise the interests of existing lenders, and the increased issuance of payment-in-kind toggle notes over the past two years," all of which could put downward pressure on ultimate recovery values.
The article goes in-depth, looking at historical trends in recovery values, key factors that affect ultimate recovery, and implications for credit loss resulting from wide variation in recovery values.
"The mean recovery rate from 1987 through the third quarter of 2008 was 60.6% on a nominal basis and 51.2% on a discounted basis. However, looking at a histogram of discounted recovery rates at the instrument level, we see a somewhat bimodal distribution, with 21% of instruments recovering less than 10%, and 15% of instruments recovering at 100%," said Ms. Vazza.
Recoveries vary greatly over time and within any period, even for similar instrument types. Factors such as the stage in the business and default cycle as well as instrument-specific factors, such as collateral and position in capital structure or debt cushion, can account for a portion of the variance.
This article is part of our premium Global Fixed Income Research content, which is available to premium subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contact:
Mimi Barker, New York (1) 212.438.5054, [email protected]
Analyst Contacts:
Diane Vazza, New York (1) 212.438.2760