Measuring Loss on Latin American Defaulted Bank Loans: A 27-Year Study of 27 Countries
by Lew Hurt of Citibank, and
Akos Felsovalyi of Citibank
Introduction: The objective of this study is to describe the characteristics of commercial and industrial (D&I) bank loan defaults in Latin America. The most important attribute is the amount lost if a loan defaults. For Banks, improved understanding of losses enables lenders to make better pricing decisions, to allocate capital more efficiently, and to obtain more accurate estimates of loan losses and valuations of existing loan portfolios. For investors, the benefit is a more informed decision about portfolio diversification.
The scope and scale of Citibank's global franchise allows us to analyze loan losses outside the U.S. Loss studies are an integral part of well developed internal debt rating systems. In these studies, loss in the event of default (LIED) is defined as the present value of all costs of credit incurred on a loan through the full workout process, expressed as a percentage of the initial default amount. That definition applied to the unique set of Latin American loan defaults yields a loss in the event of defaults value (LA LIED) of 31.8%. In other words, based on our past experience, an investor should expect to recover, on average, 68.2% of the default amount for C&I loans that default in Latin America. By comparison, a study by Citibank's Portfolio Strategies Group published in 1995 found U.S. LIED to be 34.8% implying a 65.2% recovery rates in the U.S. loan market.
Published in: Journal of Lending & Credit Risk Management, Vol. 81, No. 2, (October 1998), pp. 41-46.
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