Debt Recoveries for Corporate Bankruptcies

by David T. Hamilton of Moody's Risk Management Services, and
Lea V. Carty of Moody's|KMV

June 1999

Introduction: This study extends and updates our previous defaulted debt recovery research by considering the type, timing, and value of actual payouts on a sample of 829 debt obligations of firms that have filed for Chapter11 bankruptcy. Our dataset is unique in that it allows us to analyze and compare recovery values for the entire spectrum of corporate obligations, from senior secured down to preferred stock, and including publicly and privately placed bonds, as well as bank debt. The results of this study broadly support Moody's practice of making rating distinctions between different debt obligations of the same company based on factors such as seniority and security. Briefly, the study finds that:

• Firm-level recovery rates average56.7%. While these rates do not vary significantly by bankruptcy type (prepackaged Chapter11 versus Chapter11), they do vary with capital structure. Firms with entirely private wholesale debt financing recover a median value of 78.4% of total claims. This contrasts with 50.6% for firms that issue at least some public debt, a proxy for capital structure complexity.
• Recovery rates at the obligation level increase smoothly with seniority and security, with senior secured obligations exhibiting the highest median recovery rates(100%) and preferred stock the lowest(2.2%).
• The higher an obligation's position in the capital structure, the more likely it is in the bankruptcy resolution to receive new assets of at least the same seniority/security as the pre-petition claim or cash. Secured public bonds, for example, received new bonds and cash in 60% of the cases. Claims lowest in the capital structure are more likely to receive assets such as new equity or warrants.
• We analyze the value of seniority and security by considering relative recovery rates for various claims of the same obligor. Our analysis indicates that not controlling for the circumstances of each particular bankruptcy may lead to a mis-estimation of the relative value of seniority at some levels within a firm's capital structure.

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