S&P launches new bank loan recovery rating that anticipates loss or recovery upon default

By Sara Rosenberg

New York, Dec. 9 - Standard & Poor's launched a new rating scale for U.S. secured bank loans, called a recovery rating, that indicates the range of expected loss or recovery in the event of default by an issuer.

The recovery rating will use a numerical scale with 1+ and 1 indicating different levels of likelihood that an issue will fully recover principal in the event of default. A rating of 2 indicates expected substantial recovery of principal (80-100%). A rating of 3 indicates expected meaningful recovery of principal (50-80%). A rating of 4 indicates expected marginal recovery of principal (25-50%). And a rating of 5 indicates expected negligible recovery of principal (0-25%)

"Standard & Poor's Recovery Ratings will allow banks and institutional investors to quantify the likely loss they will experience if specific assets in their portfolios default," said William Chew, managing director of S&P, in a news release.

"Used in conjunction with Standard & Poor's traditional default-oriented Corporate Credit Ratings, our new Recovery Ratings for secured bank loans in the U.S. will provide investors with the two critical dimensions of credit risk: default and loss given default. This information can then be used in risk management strategies, including calculating required reserves and capital adequacy."

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