Special Comment
April 2007
Contact
Phone
New York
Kenneth Emery
Richard Cantor
David Keisman
Sharon Ou
1.212.553.1653
Moody's Ultimate Recovery Database
Summary
•
•
•
•
•
•
•
Moody's ultimate recovery database includes detailed recovery information on nominal and discounted ultimate
recoveries for approximately 3500 loans and bonds from over 720 US non-financial corporate default events.
The average discounted ultimate recovery rate on loans included in the database is 82 percent, while the median is
100 percent. Bonds' average and median recovery rates are 37 percent and 24 percent, respectively. The distribution of loan recovery rates is skewed to the right, while the distribution of bond recovery rates is skewed to the left.
Ultimate discounted debt recovery rates are significantly influenced by their priority-of-claim position in the
defaulted corporate family's liability structure and the relative shares of debt above and debt below a particular
instrument within that structure.
Corporate family recovery rates, which measure the enterprise value of the corporate family relative to its total liabilities at default resolution, are widely dispersed with a mean recovery rate of 52 percent and a standard deviation
of 26 percent. Family recovery rates do not vary significantly across most industry types.
Corporate family and bond recovery rates exhibit considerable cyclicality as measured by their correlation with
the US speculative-grade default rate. Loan recovery rates exhibit considerably less cyclicality.
There is no observed systematic relationship between ultimate discounted family recovery rates and Moody's
credit-loss based corporate family ratings (CFR) prior to default, suggesting that credit fundamentals in advance
of default - which are the determinants of CFRs - are predictive of default but are not predictive of loss given
default..
There exists a close association between discounted ultimate recovery rates and post-default debt trading prices.
In a regression context, trading prices explain approximately 50 percent of the variation in ultimate recovery rates.
Moody's Ultimate Recovery Database
The data underlying the research in this recovery study is available in
Moody's Ultimate Recovery Database (URD). The database includes
over 3,500 loans and bonds, over 720 different non-financial
corporates, and over $400 billion in debt since 1987. Ideal for finetuning LGD models, the service provides raw data addressing three
approaches to calculating recovery, including the settlement method,
the trading price method, and the liquidity event method, along with a
preferred method indicator. To facilitate due diligence, the database
has been fully annotated and contains information related to the logic,
events, and assumptions driving the recovery estimate as well as
details on recovery outcomes. Ensuring the accuracy of the data, the
URD is only updated by experienced credit professionals who focus on
analyzing recovery information and stay current with case law. For
more information about the URD, please call Norm Stewart in New York
at (212) 553-4877 or Taran Kaur in London at (44 20) 7772-8714
2
Moody’s Special Comment
Overview
In contrast to post-default debt trading prices, which are often used to measure creditors' recovery rates, "ultimate
recoveries" refer to the recovery values that creditors actually receive at the resolution to default, usually at the time of
emergence from Chapter 11 bankruptcy proceedings.1 Coincident with the introduction in 2006 of Moody's speculative-grade loss-given-default (LGD) assessments, which reference ultimate recovery, Moody's markedly increased the
size and coverage of its ultimate recovery database, which now includes detailed recovery information on nominal and
discounted ultimate recoveries for approximately 3500 loans and bonds taken from over 720 US non-financial corporate default events.2 In this Special Comment, we provide an overview of this database and present summary statistics
characterizing the ultimate recoveries included.
In constructing the database, the coverage is US non-financial corporates with over $50 million in debt at the time
of default.3 Three alternative methods are used to derive nominal valuations on these obligors' debts at the time of
resolution and an indication in the database of which method Moody's considers to be the most representative of the
actual recovery.4 To obtain discounted ultimate recoveries, each nominal recovery is discounted back to the last time
interest was paid using the instrument's pre-petition coupon rate. Exhibit 1 shows the annual distribution of default
events by default date and resolution date, illustrating the database's inclusion of the high number of defaults that
occurred during the most recent credit cycle from 1999 through 2003.
Exhibit 1
Defaults and Resolutions by Year
120
100
Defaults
Resolutions
Number
80
60
40
20
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
0
Exhibit 2 shows the industry representation across default events included in the database. Consistent with the
industry representation of the speculative-grade debt markets as a whole, the manufacturing, telecommunications,
consumer products, and retail industries are well represented among defaulted obligors.
1.
2.
3.
4.
Resolutions also occur when distressed exchanges are consummated and when missed interest payments outside the grace period are cured. Default events are
defined under Moody's standard definition of default that encompasses bankruptcy, distressed exchanges, and missed interest payments.
Specifically, 721 default events are taken from 682 unique corporate families. These default events involve 3492 individual loans and bonds as part of 1611 unique
security classes.
The database includes both Moody's rated and unrated corporate obligors.
The three alternative valuation methods are: 1) settlement method whereby the value of the settlement instruments is taken at or close to default, 2) liquidity method
whereby the value of the settlement instruments is taken at the time of a liquidity event, and 3) trading price method whereby the value of the settlement instruments
is based on the trading prices of the defaulted instruments at or post-emergence.
Moody’s Special Comment
3
Exhibit 2
Defaults by Industry
120
100
Count
80
60
40
20
AIR
CR
NA
AF
TU
RA DEF T
L P EN
RO S E
DU
CT
S
PH
AR
M
UT
E
FO NVI ILIT
Y
RE RO
ST NM
P R EN
OD T
CH UCT
EM S
I
PA CAL
CO CKA S
NS GI
TR NG
U
WH CTIO
OL N
ES
AL
TR E
AN
SP
HE A U
ME AL TO
TA THC
LS
A
& RE
M
INI
NG
HO
TE TE
L,
C
GA H
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RV
IC
ES
ME
DI
A
MA
NU
EN F
ER
TE G Y
LE
CO C O
NS M
UM
ER
RE
TA
IL
0
The data in Exhibit 3 illustrate the mix of debt types across the 3492 defaulted loans and bonds in the database.5
Overall, bonds make up approximately 60 percent of total debts with loans comprising the remaining 40 percent.
Among loans, the data is roughly split between revolvers and term loans. Among bonds, senior unsecured bonds comprise almost 45 percent of all bonds, with the other bonds split largely among senior secured bonds and subordinated
bonds.
Exhibit 3
Counts of Debt Types
2500
2147
Count
2000
1345
1500
1000
945
708
637
441
500
381
328
52
4
Lo
an
s
Bo
nd
s
To
tal
ina
te
d
Ju
nio
rS
ub
or
d
To
tal
Bo
nd
s
on
ds
ted
B
Bo
nd
s
Su
bo
rd
ina
ted
dB
on
rS
ub
or
di n
a
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nio
ns
e
cu
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ed
Se
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ec
ur
rS
nio
Se
5.
ds
ds
Bo
n
Lo
an
Te
rm
Re
vo
lve
r
0
Many individual security classes in the database contain multiple loans and bonds. As a result, in order to avoid placing undo weight on individual security classes
which contain multiple debts of the same type, the debt-level recovery rate statistics that we report throughout this paper are "security-class weighted". Effectively, this
weighting results in 1065 bond observations and 670 loan observations that are used in calculating debt-level recovery rate statistics.
Moody’s Special Comment
Recovery Rates
BY DEBT TYPE
As can be seen in Exhibit 4, bank loans recover an average of 82 percent at resolution on a discounted basis with a corresponding median of 100 percent. In contrast, senior secured bonds recover an average of 65 percent with a median
of 67 percent. Discounted ultimate recovery rates on bonds vary from an average of 38 percent for senior unsecured
bonds down to 15 percent for junior subordinated bonds. Across all bonds, the average recovery rate is 37 percent
with a median of 24 percent.
Exhibit 4
Discounted Ultimate Recovery Rates by Debt Type
100%
1.0
Mean
Median
82%
0.8
Recovery Rate
67%
65%
0.6
38%
0.4
37%
30%
29%
27%
18%
0.2
24%
14%
15%
2%
0.0
Bank Loan
Senior Secured
Bond
Senior
Unsecured
Bond
Senior
Subordinated
Bond
Subordinated
Bond
Junior
Subordinated
Bond
All Bonds
Exhibit 5 shows the distributions of loan and bond recovery rates, indicating strong skewness in both distributions
whereby the probability of full recovery for loans is relatively high and the probability of low recovery for bonds is also
relatively high.6
6.
Of the 1735 security-class weighted loans and bonds used in constructing the distributions shown in Exhibit 5, 78 loans and 41 bonds are non-defaulting instruments
of defaulting obligors incurring distressed exchanges. Excluding these non-defaulting debts does not materially alter the distributions shown in Exhibit 5.
Moody’s Special Comment
5
Exhibit 5
Loan and Bond Recovery Rate Distributions
70%
60%
Loans
Bonds
Probability
50%
40%
30%
20%
10%
0%
0-9
10-19
20-29
30-39
40-49
50-59
60-69
70-79
80-89
90-99
=100
Recovery Rate
An important determinant of security-class recovery rates is the priority position of a debt within an obligor's liability structure. Indeed, a guiding principle underlying Moody's LGD assessments is that liability structure plays a key
role in determining security-class recovery rates. In Exhibit 6, we construct "junior", "mezzanine", and "senior" debts
defined by their position within an obligor's liability structure on the basis of the percentage of total liabilities above
and below them in priority of claim status.7 As illustrated in Exhibit 6, average recovery rates vary significantly by the
debts' priority position in the liability structure. Junior, mezzanine and senior debts recover an average of 21 percent,
58 percent, and 93 percent, respectively.
Exhibit 6
Debt Structure Matters
Average Recovery Rate
100%
93%
80%
58%
60%
40%
21%
20%
0%
Junior
Mezz
Senior
Junior: >70% of total debt above, Mezzanine: 25% above and 25% below, Senior: >70% of below
7.
6
Security classes where more than 70 percent of total liabilities are senior to it are defined as junior, mezzanine debts are defined as those where at least 25 percent of
total liabilities are both junior and senior to it, and senior debts are those where at least 70 percent of total liabilities are junior to it.
Moody’s Special Comment
In a similar manner, Exhibits 7 and 8 demonstrate that a debt's position in the liability structure matters across
particular debt types as well. In Exhibit 7, as the percentage of total debt junior to the bank loan increases, the average
recovery rate increases. Loan recovery rates average 95 percent when junior debt equals at least 75 percent of total liabilities, compared to an average of 69 percent for loans with junior debt less than or equal to 25 percent of total liabilities.
Exhibit 7
Debt Structure Matters: Bank Loans
Average Recovery Rate
100%
80%
95%
90%
69%
72%
0%<=X<=25%
25%<X<=50%
60%
40%
20%
0%
50%<X<=75%
>75%
Debt Below
(as a % of total debt)
For senior unsecured bonds, Exhibit 8 shows that average recovery rates decline as the percentage of total liabilities senior to the bonds increases. Recovery rates average only 30 percent for those bonds with senior debt equal to at
least 50 percent of total liabilities, compared to 43 percent for bonds with senior debt equal to less than 30 percent of
total liabilities.
Exhibit 8
Debt Structure Matters: Bonds
50%
Average Recovery Rate
43%
40%
30%
25%
0%
<30%
30-50%
>50%
Debt Above
(as a % of total debt)
Moody’s Special Comment
7
CORPORATE FAMILY RECOVERY RATES
While liability structure is one key determinant of debt recovery rates, another is the total enterprise value of the corporate family at resolution available to be distributed to creditors. Measuring this value relative to the total liabilities
of the firm implies an overall "corporate family" recovery rate. Exhibit 9 shows the distribution of corporate family
recovery rates for defaulted obligors that had both loans and bonds outstanding at the time of default. The mean family recovery rate equals 52 percent with a standard deviation of 26 percent, indicating a relatively wide dispersion in the
range of possible outcomes.8
Exhibit 9
Distribution of Family Recovery Rates
14%
12%
Probability
10%
8%
6%
4%
2%
0%
0-9
10-19
20-29
30-39
40-49
50-59
60-69
Family Recovery Rate
70-79
80-89
90-99
=100
Exhibit 10 shows average family recovery rates by industry, indicating relatively little variation in family recovery
rates by industry. Fifteen of the twenty-three industries have average family recovery rates that fall between 40 and 60
percent, and the industries that have average recovery rates outside this range have very few defaulted obligors comprising those individual industries. The regulated utilities industry stands out as the five defaulted obligors included in
that industry experienced an average family recovery rate of approximately 90 percent. This high recovery rate is
likely driven by utilities' often-observed behavior of strategically choosing to default, when asset values are still relatively high, in order to seek rate relief from regulators. Although the 68 obligors comprising the telecommunications
industry experienced an average family recovery rate of only 36 percent, the vast majority of these obligors defaulted
during the latest credit cycle. It remains unclear whether future telecommunications defaulters would experience similarly low family recovery rates.
8.
8
For the majority of issuers not on the precipice of default, Moody's LGD assessments methodology assumes a beta distribution of family recovery rates with mean
equal to 50 percent and standard deviation equal to 26 percent. In the database, loan-only families are found to have a significantly higher mean family recovery rate,
while bond-only families have a lower mean family recovery rate. In these cases, Moody's LGD methodology incorporates these findings by adjusting the mean of the
beta distribution correspondingly. Moody's LGD methodology also adjusts the mean of the beta distribution to reflect the significantly higher family recovery rates historically experienced by regulated utilities.
Moody’s Special Comment
Exhibit 10
Family Recovery Rates by Industry
100%
120
Mean
Count
100
80%
80
60%
60
40%
40
20%
20
0
EN
VIR
ON
ME
TE N T
LE
CO
M
TE
C
CO DEF H
NS EN
TR S E
U
HE CTI
AL ON
TH
CA
R
TR E
AN
SP
AU
TO
MA
NU
F
M
WH ED
I
HO O LE A
TE S A
L
L,
GA E
CH MIN
EM G
IC
ME S ALS
TA ERV
LS IC
& ES
M
I
CO NING
NS
UM
ER
RE
T
FO
A
R E EN I L
ST ER
P R GY
OD *
PA UCT
CK S
AG
NA
ING
TU
RA
PH
LP A
RO RM
DU
C
AIR TS
CR
AF
UT T
ILI
TY
*
0%
Exhibit 11, which shows the distribution of months spent in bankruptcy and associated family recovery rates, suggests that time spent in bankruptcy has a minimal effect on ultimate discounted family recovery rates. However,
regression analysis does indicate a minor statistically significant effect with recovery rates declining as time in bankruptcy increases. The distribution of months spent in bankruptcy, as indicated by the blue bars, shows that approximately one half of obligors spend less than twelve months in bankruptcy before emerging. The average time spent in
bankruptcy is 15 months.
Exhibit 11
30%
60%
25%
50%
20%
40%
15%
30%
10%
20%
5%
10%
0%
Family RR
% of Total BKs
Time to Resolution and Family Recovery Rates
0%
<6
6-12
12-18
18-24
24-30
30-36
36-42
Months in BK
Moody’s Special Comment
9
In Exhibit 12, we show the impact of default and emergence types on discounted ultimate family recovery rates.
Eighty-six distressed exchanges experienced relatively high family recoveries with an average rate of 69 percent. The
629 bankruptcies had an average family recovery rate of 49 percent, with the average for those emerging as a going
concern at 54 percent and those liquidating their assets at 44 percent.
Exhibit 12
Family Recovery Rates and Default Resolution Types
100%
700
600
80%
500
60%
54%
400
49%
44%
Count
Family Recovery Rate
69%
300
40%
200
20%
100
0%
0
Distressed Exchange
BK
BK--Emerged
BK--Liquidated
CYCLICALITY OF ULTIMATE RECOVERY RATES
Using post-default trading prices as the measure of recovery, Moody's has for many years documented an inverse relationship between recovery rates and the US speculative-grade default rate, indicating significant cyclicality in recovery
rates. Examining annual average ultimate family recovery rates, as shown in Exhibit 13, reveals that cyclicality is also
evident in ultimate recovery rates. For example, in Exhibit 13, as the number of defaults began to increase in 1999,
ultimate family recovery rates started to decline. And since 2002, as the number of defaults has declined, family recovery rates have been increasing.
Exhibit 13
Family Recovery Rates by Default Year
80%
70%
120
Mean (L)
Count (R)
100
50%
40%
30%
80
60
40
20%
10%
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
0%
10
Moody’s Special Comment
20
0
Count
Family Recovery Rate
60%
In Exhibit 14, each observation shown is the average family recovery rate and average US speculative-grade
default rate for a particular year.9 The solid line indicates the log-linear regression relationship between annual average family recovery rates and speculative-grade default rates, indicating a strong negative relationship between the
two. In fact, the regression results indicate that movements in the annual average speculative-grade default rate
explain almost one-half of the variation in annual average family recovery rates.
Exhibit 14
Family Recovery Rates and US Speculative-Grade Default Rates
(Annual Data)
80%
Family Recovery Rate
70%
y = -0.11Ln(x) + 0.19
R2 = 0.44
60%
50%
40%
30%
20%
10%
0%
0%
2%
4%
6%
8%
10%
12%
Spec-Grade Default Rate
Interestingly, the cyclicality observed in family recovery rates is also observed in bond recovery rates but it is
observed in loan recovery rates to a much lesser degree. This can be seen by comparing Exhibits 15 and 16, which
show data on ultimate bond recovery rates by year, and Exhibits 17 and 18, which show the same data for ultimate loan
recovery rates. Clearly, the cyclicality in loan recovery rates is much less evident than for bond recovery rates. The
most likely explanation for this difference is that within an obligor's liability structure, bonds tend to reside in the middle or bottom half of the liabilities in terms of priority of claim, which makes their recovery rates relatively sensitive to
movements in the realized family recovery rate. On the other hand, loans tend to reside at the top of the liability structure in terms of priority of claim where recovery is relatively less sensitive to movements in the realized family recovery
rate.
9.
Effectively, this construction weights the data for each year equally, regardless of the number of defaults in a particular year.
Moody’s Special Comment
11
Exhibit 15
Bond Recovery Rates by Default Year
180
80%
Mean (L)
70%
160
Count (R)
140
Bond Recovery Rates
60%
100
40%
80
30%
Count
120
50%
60
20%
40
20
0%
0
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
10%
Exhibit 16
Bond Recovery Rates and US Speculative-Grade Default Rates
(Annual Data)
80%
70%
y = -0.143Ln(x) - 0.037
R2 = 0.48
60%
50%
40%
30%
20%
10%
0%
0%
2%
4%
6%
Spec-Grade Default Rate
12
Moody’s Special Comment
8%
10%
12%
Exhibit 17
Loan Recovery Rates by Default Year
Mean (L)
Count (R)
100%
120
100
80
60%
60
Count
Loan Recovery Rates
80%
40%
40
20%
20
0
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
0%
Exhibit 18
Loan Recovery Rates and US Speculative-Grade Default Rates
(Annual Data)
120%
y = -0.04Ln(x) + 0.68
R2 = 0.22
Loan Recovery Rate
100%
80%
60%
40%
20%
0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Spec-Grade Default Rate
Moody’s Special Comment
13
MOODY'S RATINGS AND ULTIMATE RECOVERY RATES
An important issue is whether family LGD rates vary systematically with an individual obligor's credit fundamentals
and the probability of default in advance of default.10 Moody's corporate family ratings (CFRs) are expected creditloss based ratings which incorporate expectations of both the probability of default and family LGD. While probability of default is unambiguously higher at lower rating levels, it is less clear whether the same credit fundamentals, like
leverage and interest coverage, that drive default probability also drive expected family LGD. The data in Exhibit 19
shows there has historically been no systematic relationship between ultimate discounted family recovery rates and
CFRs, either at origination (when the issuer first obtains a Moody's rating) or immediately prior to default.11 This
suggests that credit fundamentals speak mainly to probability of default rather than LGD.
Exhibit 19
Family Recovery Rates and Moody's Corporate Family Ratings
1.0
At default
Orig.
Family Recovery Rate
0.8
0.6
0.4
0.2
0.0
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
ULTIMATE RECOVERY RATES VERSUS POST-DEFAULT TRADING PRICES
The data in Exhibit 20 indicate that average discounted ultimate recovery rates and post-default trading prices across
debt types are relatively close to each other. For example, bank loans have an average discounted ultimate recovery
rate of 70 percent, while the average post-default trading price recovery rate is 65 percent. Note, however, that this
analysis is based on the 809 security classes for which we have trading prices, versus the total of 1735 security classes
included in the database.12
10. This is a firm-specific microeconomic issue that is distinct from the observed macroeconomic phenomenon that recovery rates vary inversely with the overall speculative-grade default rate.
11. This lack of a systematic relationship is also found at other horizons, including one, two, and three years prior to default
12. Seven hundred of these are bond prices and 109 are loan prices.
14
Moody’s Special Comment
Exhibit 20
Ultimate versus Post-Default Trading Price Recovery Rates
100%
Ultimate
Recovery Rate
80%
70%
Trading Price
65%
55% 52%
60%
38% 35%
40%
27% 28%
35% 33%
30% 28%
16%
20%
17%
0%
Bank Loan
Sr. Secured
Bond
Sr. Unsecured
Sr.
Bond
Subordinated
Bond
Subordinated
Bond
Jr.
Subordinated
Bond
All Bonds
Exhibit 21 presents regression results indicating the predictive power of post-default trading prices for ultimate
discounted recoveries received at emergence. The results suggest that trading prices are highly significant and explain
approximately 50 percent of the variation in discounted ultimate debt recovery rates.
Exhibit 21
Ultimate versus Post-Default Trading Price Recovery Rates
Post-Default Trading Prices Predictive of Ultimate Recovery Rates
(Ultimate=.90 * trading price + .06, R2=.50)
Ultimate Recovery
100%
80%
60%
40%
20%
0%
0%
20%
40%
60%
80%
100%
Post-Default Trading Price
Moody’s Special Comment
15
Related Research
Special Comments:
Corporate Default and Recovery Rates, 1920-2006, February 2007 (102071)
Determinants of Recovery Rates on Defaulted Bonds and Loans for North American Corporate Issuers: 1983-2003,
December 2004 (90593)
Recovery Rates On North American Syndicated Bank Loans, 1989-2003, March 2004 (81684)
Rating Methodology:
Probability of Default Ratings and Loss Given Default Assessments for Non-Financial Speculative-Grade Corporate
Obligors in the United States and Canada, August 2006 (98771)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report
and that more recent reports may be available. All research may not be available to all clients.
To order reprints of this report (100 copies minimum), please call 1.212.553.1658.
Report Number: 102664
Author
Senior Production Associate
Kenneth Emery
Yelena Ponirovskaya
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investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of
each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.
MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by
MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000.
Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of
MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and
have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder
Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
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Moody’s Special Comment