The Downhill Slope on the Road to Recover(ies)
July 9, 2009
Not that I hope to conjure up sympathy, but I am writing this with a miserable summer cold. A condition that has left me wretched and cranky but also provided me with a metaphor regarding the subject of recovery and (come on, take the step with me) recovery rates. Blame that one on the Dayquil.
And on the timing of Fitch Ratings, which released a report on recovery rates in the midst of my suffering. And what news does the rating agency have to bear on the subject? Not good. Recovery rates on defaulted U.S. bonds and loans, of which there are plenty, have dropped sharply in 2009, averaging just 21.8% for bonds and 57.5% for loans.
“The weak economy and still difficult funding conditions are having an unwelcome dual negative effect on credit losses—driving up corporate defaults and simultaneously depressing recovery rates,” said Mariarosa Verde, head of the rating agency’s credit market research, adding that the default rate here in the U.S. climbed to 9.5% in the first six months of 2009.
The study uses the last surge in defaults as a frame of reference. Companies that defaulted and filed for bankruptcy from 2000 to 2006 on average emerged from bankruptcy with just 35% of their prebankruptcy debt and 53% of their prebankruptcy asset value. And “defaults occurring in this downturn will very likely experience worse results, with deeper debt and asset value discounts,” Verde said.
Such negative expectations stem, in part, from the aggressive underwriting of the buyout boom and the role it’s playing in current recovery trends, especially with respect to loans. Loan recovery rates in 2009 are running well below historical levels, even lower than those associated with the 2001 to 2002 period.
The study also looks at the relationship between the three main measures of recovery: the 30-day post-default price, the price of the prepetition instruments at emergence from bankruptcy and recovery outcomes from actual bankruptcy documents.
“The average 30-day price of defaulted bonds and loans from 2000 to 2006 was 31% and 72% of par, respectively, for companies in Fitch’s study,” said Eric Rosenthal, senior director of credit market research. “At emergence, the same bonds and loans traded at 41% and 81% of par, respectively.”
Market prices fell so sharply in the last turbulent quarter of 2008 that, on a mark-to-market basis, defaults in the first part of 2009 have resulted in limited incremental losses. Fitch analysts found that while the average bond recovery rate through May was just 21.8% of par, at the beginning of the year the same bonds were already trading at a very low 25% of par.
How’s that for an upside?
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