Suddenly Structure Mattered: Insights into Recoveries of Defaulted Debt
by Karen Van de Castle 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.