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Suddenly Structure Mattered: Insights into Recoveries of Defaulted Debt

by Karen Van de Castle of Portfolio Management Data,
David Keisman of Portfolio Management Data, and
Ruth Yang of Portfolio Management Data

May 24, 2000

Introduction: Today's economy is one of the strongest in history. In 1999 alone, the S&P 500 returned nearly 20% and the GDP grew by 5.7%. Despite the idyllic economic environment, companies defaulted on their debt at a record rate in 1999. The RatingsDirect article "Greater Risk Means More Defaults in 1999" reported that a record 75 rated or formerly rated companies in the U.S. defaulted on $32.4 billion of debt, and that the worldwide default rate of 2.15% was nearly twice that of 1998, surpassed only by the default rates of the 1989-1991 junk bond fallout. In the first four months of 2000 alone, more than 25 companies have filed for bankruptcy. Lenders clearly need a well-defined credit model that encompasses the various risk elements of default and recovery.

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