More News‘Debt Cushion’ Cited as Key Factor in Recovery Rates On Defaulted Loans

‘Debt Cushion' Cited as Key Factor in Recovery Rates On Defaulted Loans

A recent study by Moody’s into recovery rates on defaulted North American syndicated bank loans stated that a company’s debt cushion – the amount of debt junior to the loan – as primary among several issuer and loan characteristics that help explain recovery rates across issuers. ‘Employing a multivariate regression model, we find that, in order of importance, a) debt cushion (the amount of debt junior to the loan), b) loan issue amount, c) whether the issuer’s industry is in distress, and d) time from loan origination to default all add statistically significant explanatory power in helping to explain the variation in individual loan recoveries across issuers,’ said Vice President and Senior Analyst Kenneth Emery. The survey also discovered that loss severity rates are significantly higher for bonds than for loans. ‘For borrowers that defaulted on both loans and bonds, loan losses are on average only two-fifths the size of bond losses,’ noted. Emery. ‘Additionally, as measured by the standard deviation around the mean, the variability of bond recoveries is more than twice as large as the variability of loan recoveries.’

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