More NewsU.S. Syndicated Bank Loans Rated Higher, Suffer Lower Losses than Bonds – Report

U.S. Syndicated Bank Loans Rated Higher, Suffer Lower Losses than Bonds - Report

Because syndicated bank loans default at lower rates and suffer less severe losses on average when they do default, their overall credit losses are significantly lower than those for public bonds, according to a report by Moody’s. The rating agency demonstrated that credit losses on bonds are approximately three times higher than those on loans for speculative-grade issuers. The report confirms prior research by Moody’s that showed loan default rates are materially lower than bond default rates, because on average one out of five issuers that default on their bonds does not default on its loans. The study suggests that the divergence between default rates on bonds and loans increased during the peak of the default cycle in 2002. Also driving the large difference in credit loss experience between loans and bonds are differences in loss severity: when issuers default on both loans and bonds, the average loss as a percentage of par value on loans is only 43 per cent of the loss on the same company’s bonds, because the loan is typically secured and enjoys higher priority of claim in bankruptcy, said Moody’s.

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