Fitch: Loan Recovery Ratings Drop in Q1
June 19, 2009
The recovery ratings assigned to U.S. leveraged loans dropped dramatically during the first quarter of 2009, according to Fitch Ratings report published Thursday.
Starting in the fourth quarter of 2008 and continuing through the first quarter of 2009, the number of U.S. loans rated RRI declined, while the number of loans with a lower recovery ratings—RR2 through RR6—increased (see chart below).
A RR1 rating indicates a likely recovery of 91%-100% for loan holders if a company defaults, while RR2 through RR6 ratings indicate lower recoveries. The shift
The shift to lower recovery ratings has been caused by the current recession. Making matters worse is the fact that many of these loans were underwritten with loose covenants, Fitch notes in its report.
“The downward shift further coincides with the overall deterioration in corporate credit quality and rising default rates,” Fitch analysts said in the report. For Fitch-rated speculative grade borrowers, downgrades have exceeded upgrades for nine consecutive quarters, beginning in the first quarter of 2006.
However, Fitch analysts point out that there are encouraging signs emerging. “There are indications that market developments over the past several months could slow this trend,” Darin Schmalz, a director at Fitch, said in a statement. Fitch said the recent rally on the high yield bond market could be a major factor in “slowing the rate of deterioration” in recovery ratings among large leveraged loan issuers as it provides issuers with the capital necessary to refinance maturing loans.
For more information on related topics, visit the following:
