Comment by: Iain Cox. Posted 13 years ago [2010-08-08 21:03:16]

We may find that the recovery rates in this cycle will be lower but that the distressed exchanges are delaying rather than increasing the final recovery. If the exchange results in another default later with lower recoveries, then you end up with a statistical mask over the whole process (which cycle did it belong to?). This will also be complicated by the protracted U shape of this recovery rather than the V of most rebounds. Less rebound in the underlying asset prices and the lower end aggregate demand will mean more restructures will be unsucessful and ultimate recoveries lower.

Comment by: Anonymous. Posted 13 years ago [2010-08-04 21:59:17]

It makes sense for there to be a general correlation, but it would also be specific to the circumstances of each recession. Clearly the recovery prices are driven primarily be demand in the market for the defaulted debt rather than some theoretical valuation of what it is actually fundamentally worth, therefore the factors that govern recovery rates are probably things like number of distressed debt funds and their ability to raise cash, market sentiment, ability of competitors to acquire the assets. Further as legislation changes e.g. changes to Chapter 11 rules and financial engineering develops (including the arrival of a CDS market) this will alter the number of companies that opt for a distressed exchange and their ability to effect this with creditors

Comment by: Anonymous. Posted 13 years ago [2010-07-30 00:13:43]

Still, the Moody's report - which I skimmed - does not support the existence of lower recovery during high-default periods. The Moody's analyst believes this relationship exists, but the 2008-2010 data do not bear it out. The report mentions distressed exchanges several times as skewing the results, but this is weak given that (i) there's no comparison to numbers of distressed exchanges in prior periods and (ii) distressed exchanges are defaults - regardless - so they need to be included when searching for alleged dependencies between default rate and recovery.

Comment by: Anonymous. Posted 13 years ago [2010-07-28 16:49:03]

As to the inverse correlation of default rates and recovery rates, quarterly data show it's not conjecture but stark reality. It's also supported by common sense: when defaults are high, liquidity and animal spirits are at a low ebb, thus low recovery rates. The relationship has been observed going back to the high default rate of the 1990-1991 period.

Comment by: Fishknife -. Posted 13 years ago [2010-07-28 14:43:51]

Moody's boast of having default data going back to the days of the railroad bonds, so why does this analysis only use data going back to 1988? Perhaps those old card files are getting a little dusty.

Comment by: Anonymous. Posted 13 years ago [2010-07-28 13:56:42]

Proper assessment of recovery upon default is very important. A dominant "state of the art" idea in recent years has been that default recovery has negative correlation with default rate. It's not clear to me from this description above if the Moody's report supports this conjecture or not.