Bankrupt Bank Loan Recoveries

by Lea V. Carty of Moody's|KMV

June 1998

Introduction: In more than 50% of all cases, Moody's rates companies' bank loans higher than the bonds it rates for the same issuer. This "rating spread" indicates, in part, our opinion that the loans will be worth more in the event of a default, than the bonds. In our earlier study of bank loan recoveries (Defaulted Bank Loan Recoveries, Moody's Special Report, Nov. 1996), we measured the dispersion of recovery estimates for defaulted bank loans by looking at both secondary market pricing and actual cash flows to the defaulted debts. This study extends and updates our previous research by considering the nature, timing, and value of actual payouts to a sample of 200 bankrupt bank loan claims. The results obtained from this new dataset are then compared with recovery estimates based on market pricing. Briefly, the study finds that:

• 80.2% of the total value recovered from 200 bankrupt bank loans derives from additional bank loans or cash. Another 19.4% is divided amongst bond debt, equity, and other payments. Just 0.4% takes the form of preferred stock, rights, or warrants.
• The average length of time to bankruptcy resolution is 1 year and 3 months. This varies considerably with the type of filing. Prepackaged Chapter 11's average just 3 months, while regular Chapter 11's take 18 months on average to complete.
• Senior secured bank loans eventually recover 87% of their value on average after bankruptcy. This number falls to 79% for senior unsecured loans. However, the dispersion in recovery rates is high, generating significant uncertainty of the value of any particular loan.
• Average recovery rates vary by bankruptcy and collateral type with prepackaged Chapter 11s and accounts receivable/cash/inventory collateral being associated with greater recovery. Regular Chapter 11s and collateral in the form of subsidiaries' stock are associated with lower recovery.
• An update to Moody's previous research on recoveries for defaulted bank loans based on market pricing indicates an average post-default loan price of $70 per $100 defaulted par amount.
• There is a significant difference between the recovery rates estimated on the basis of actual bankruptcy resolution payouts and those implied by market pricing. The difference between these two is largely attributable to the high risk premium demanded by the bankrupt debt market in response to uncertainty over the payment prospects of these instruments.

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