Determinants of Recovery Rates on Defaulted Bonds and Loans for North American Corporate Issuers: 1983-2003

24 Pages Posted: 25 Jun 2007

See all articles by Richard Cantor

Richard Cantor

Moody's Investors Service

Praveen Varma

Moody's Investors Service

Abstract

This paper explores the determinants of recovery rates on defaulted loans and bonds for North American corporate issuers over a period of 21 years (1983-2003). The variables it examines include seniority, security, type of initial default event, and a wide variety of firm-specific, industry-specific, and macroeconomic factors. The report estimates their influence on recovery rates both through univariate analysis, presented in a tabular form, and through multivariate regressions. Not only do our findings corroborate results on seniority, security, and macroeconomic factors found elsewhere in the literature, but we also find that recovery rates are strongly affected by 1) the type of event precipitating default, 2) the amount of debt an issuer has outstanding that is subordinate to the defaulted security, 3) the tangibility of its assets, 4) the prevailing credit spreads at the time of default, and 5) the market-to-book ratio of the firm and its industry prior to default. The results of this study show that seniority and security are the two most important factors that impact recovery rates, followed by debt-cushion, leverage and asset tangibility. Industry and macroeconomic factors are also found to be correlated with recovery rates, sometimes very strongly.

Keywords: defaults, recoveries, loss-given-default, credit ratings

Suggested Citation

Cantor, Richard Martin and Varma, Praveen, Determinants of Recovery Rates on Defaulted Bonds and Loans for North American Corporate Issuers: 1983-2003. Journal of Fixed Income, December 2004, Available at SSRN: https://ssrn.com/abstract=996023

Richard Martin Cantor (Contact Author)

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Praveen Varma

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

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