Bloomberg reports that the rating agency Fitch predicts that recoveries on corporate bonds that default will be far lower than in previous downturns, due to the deterioration in lending standards. The estimate is grim;
Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents.
Note that there is, understandably, forecasts as to how bad the defaults will get:
Moody’s anticipates defaults will quadruple to 5.9 percent in 12 months. That assumes a “mild” recession. Judging by the amount of distressed debt, investors expect an 8 percent default rate, said Martin Fridson, head of high-yield research firm FridsonVision LLC in New York.
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Does anyone have a pointer to the total amount of HY debt scheduled to refi this year?
While I’m not sure that the raters get their dime-on-the-dollar recovery calcs from this angle, one reason why recoveries are going to be historically low is that debts have been written against badly inflated collateral values. Not only are there the ‘normal losses’ from failed investments, but the underlying collateral was never worth it’s valuation and is repriced in the process of the loss. Severely repriced. I suspect that losses from pre-1929 crashes were much greater than 58 cents on the dollar for this reason, though I don’t have any actual data on that in front of me. If so, we, again, return to 19th century speculative trajectories on this one. : (