Defaulted Bank Loan Recoveries

by Lea V. Carty of Moody's|KMV, and
Dana Lieberman of Moody's Risk Management Services

November 1996

Introduction: In 1995, Moody's began assigning credit ratings to bank loans in the belief that access to analysis and information relating to the credit aspects of bank loans is critical to the continued development of the secondary market for those instruments. For a firm with both rated bank debt and bonds, Moody's typically rates the bank debt at least as high as the bonds. Variation in the ratings "spread" between bank loans and bonds of the same company are, in part, attributable to Moody's opinion of the relative value of these instruments in default.

This research examines both secondary market loan pricing and actual payments to defaulted loan holders to arrive at estimates of the value and recovery rate of defaulted bank loans. Briefly, the study finds that:

• Secondary market pricing for defaulted U.S. senior secured syndicated bank loans indicates an average recovery rate of 71% and a median recovery rate of 77%. The standard deviation of these recovery rate estimates is 21%, and they range from a low of 15% to a high of 98% of par. The tremendous dispersion indicates that the likelihood that an individual loan's recovery rate will be much more or much less than average is high.
• A second set of recovery estimates was derived using a distinct methodology and a dataset consisting of the post-default cash flows to a sample of senior secured loans to mostly small and mid-size U.S. firms. The average of these recovery rate estimates is 79% and the median is 92%. The standard deviation of these recovery rate estimates is also large, 29%, and loan holders within the sample recovered from as little as 1% to as much as 110% of par.
• Bank loans are typically worth more upon default than unsecured bonds, a fact that is reflected in Moody's bank loan ratings. Defaulted bank loans tend to be priced 13% of par higher than the defaulted senior unsecured bonds and 37% of par higher than the defaulted subordinated bonds of the same company.

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