A Simple Approach to Infer Recovery Rates with Apr Violation from Debt Spreads

27 Pages Posted: 10 Jul 2001

See all articles by Haluk Unal

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Levent Guntay

Federal Deposit Insurance Corporation (FDIC)

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Date Written: February 27, 2001

Abstract

A Simple Approach to Estimate Recovery Rates with APR Violation from Debt Spreads by Haluk Unal, Dilip Madan, and Levent Guntay This paper proposes a simple approach to estimate the implied recovery rates embedded in the prices of the debt securities of a firm that differ in priority at time of default. The approach allows for a complex capital structure setting assuming that the absolute priority rule (APR) can be violated. The paper demonstrates that a new statistic, the adjusted relative spread, captures recovery information in debt prices. Model implied recovery rates from corporate bond prices are observed to be consistent with the findings of Altman and Kishmore (1996). Interest rates and firm tangible assets are shown to be significant determinants of recovery rates.

Suggested Citation

Unal, Haluk and Guntay, Levent and Madan, Dilip B., A Simple Approach to Infer Recovery Rates with Apr Violation from Debt Spreads (February 27, 2001). Available at SSRN: https://ssrn.com/abstract=276171 or http://dx.doi.org/10.2139/ssrn.276171

Haluk Unal (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

Levent Guntay

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States
202-8986819 (Phone)

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

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