What Determines Creditor Recoveries?
52 Pages Posted: 18 Mar 2011
Date Written: February 28, 2011
We examine determinants of creditor recoveries from defaulted debt instruments. First, we find that common measures of seniority and security, such as debt instrument types and collateral types, explain much less variations in recovery rates across defaulted debt instruments than seniority index, a new measure of seniority that we propose in this study. Second, firm-level variables, especially the trailing 12-month stock return, are more critical than industry- or macro-level variables, although the latter can also help, particularly for private firms for which stock price information is not available. The relative contribution of the industry and macroeconomic variables, however, varies with the modeling technique used. Finally, the joint distribution of default and recovery seems driven more by idiosyncratic risk than by systematic risk.
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