Investors' defaulted debt recoveries near normal, Moody's report says

By Jennifer Chiou

New York, July 27 - Moody's Investors Service said that of nearly 60 U.S. non-financial companies that have emerged from default since the trough of the credit crisis, its review shows that investors have recovered an average of about 51 cents on the dollar on defaulted debt.

This tally is not far off the historical average of 55 cents, the agency said.

"Despite the high leverage and easy terms from lenders that characterized the credit bubble, recoveries have actually been better in this default cycle than the mid-40% range seen in the previous two downturns," David Keisman, senior vice president at Moody's, said in the review.

According to the agency, the main reason recoveries have been stronger than expected is that the first wave of companies to emerge from default in the Great Recession included an historically high percentage of distressed exchanges, which typically yield higher recoveries than regular or pre-packaged bankruptcies.

Without this lift to overall recoveries from the 25% of defaults that occurred via distressed exchanges among the 57 defaults Moody's reviewed, recoveries would have been at record lows compared with previous recessions, according to the agency's report.

When analyzed by debt type, recoveries have been mostly in line with historical averages - the one exception being senior unsecured bonds. Those bonds have had average recoveries of 31.2% in the current cycle, compared with 40.3% historically, Moody's said. Much of this debt had very little junior debt that would have absorbed losses first, which made its recoveries closer to levels typical of subordinated debt.

Moody's said it continues to monitor about 180 defaulted companies, the majority of which have filed for bankruptcy. It added that recoveries are likely to be pressured because bond investors typically do not fare as well in bankruptcy proceedings.

In addition, some companies that had distressed exchanges are at risk of a subsequent default, which could produce lower recoveries than the initial default, the agency said.

The report, however, notes recoveries could be supported by a declining default rate. Recoveries are negatively correlated with the default rate, so as defaults decline, recoveries should rise.

Moody's noted that the trailing 12 months issuer-weighted U.S. speculative-grade default rate peaked at 14.52% in November 2009 and reached 6.3% at the end of June.

Moody's forecast in the report that under a baseline economic scenario, the default rate will fall sharply to end 2010 at 2.7% and reach 1.9% a year from now.

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