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Recovery rate

The share of face value creditors ultimately receive after a default, expressed as cents on the dollar; the counterpart to loss given default.

Recovery depends on where you sit in the capital-structure and on what the assets are worth. Senior secured loans historically recover well above senior unsecured bonds, which in turn recover far better than subordinated-debt.

Rules of thumb used in pricing are around 40% for senior unsecured bonds and 60 to 70% for first lien loans, but the dispersion is huge and recoveries are cyclical: they fall in the same environment that raises defaults, which compounds losses.

Example: a bond defaults and the CDS auction sets recovery at 38. Holders of $5 million face receive the equivalent of $1.9 million, and loss-given-default is 62%.

Related: default, loss-given-default, seniority, capital-structure, credit-default-swap

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

An equity curve and its drawdownAn account balance rising over a year, falling from a peak to a trough, then climbing back to the old peak.ACCOUNT EQUITY$20k$12k$8k024681012TIME (MONTHS)PEAK $16,000TROUGH $12,000DRAWDOWN−25%RECOVERY
Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.

Educational only, not advice. Spotted an error? Post in Site Feedback.