Corporate Bond Recoveries Lagging

Recoveries by corporate bond investors usually increase after a peak in the default cycle. This time that isn't the case, says Moody's.
Katie Kuehner-HebertJanuary 30, 2015
Corporate Bond Recoveries Lagging

Recoveries on U.S. company debt have improved only moderately since the financial crisis, much less than recoveries typically improve after spikes in defaults, according to Moody’s Investors Service.

Average recoveries for firms that have defaulted have increased only 2% in the period after defaults spiked from December 2008 to August 2010, according to a Moody’s report released Thursday, “U.S. Corporate Default and Recoveries: Firm-Wide Recoveries Don’t Bounce Back after Great Recession.” This percentage is much less than the 7% historical average increase after a peak in the default cycle.

Recoveries averaged 59% during the period of high defaults in the Great Recession, but since the economy started improving after August 2010, the average percentage of recoveries has only risen to 61%, according to the report.

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“A major reason for the relative high firm-wide recoveries during the Great Recession, and the limited further improvement in recoveries since then, is a high proportion of distressed exchanges and prearranged bankruptcies during the recession,” Moody’s senior vice president David Keisman and co-author of the report said in a press release.

Moreover, the latest default peak was “intense but relatively brief,” likely due to the “massive liquidity the Federal Reserve injected into the financial markets,” according to Moody’s.

“Some firms got through the cycle by avoiding a traditional bankruptcy or were helped by market liquidity only to default again relatively soon after,” Julia Chursin, associate analyst and co-author of the report, said. “Energy Future Holdings provides a perfect example of the kind of repeat defaults that we observed during this period.”

Repeat defaults since the latest peak were 39% of total defaults — more than twice the usual 17% share of all defaults, according to the report.

For those firms that defaulted at least once during the Great Recession default cycle and again after it, half of those were bankruptcies that had been preceded by a distressed exchange, up from the historical average of 28%, says Moody’s.

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