Determinants of Recovery Rates on Defaulted Bonds and Loans for North American Corporate Issuers

Abstract

The determinants of recovery rates on defaulted loans and bonds for North American corporate issuers over a period of 21 years include seniority, security, type of initial default event, and a wide variety of firm-specific, industry-specific, and macroeconomic factors. Results of univariate analysis and multivariate regressions corroborate results elsewhere on the effect of seniority, security, and macroeconomic factors. Recovery rates are also strongly affected by the type of event precipitating default, the amount of debt an issuer has outstanding that is subordinate to the defaulted security, the tangibility of issuer assets, the prevailing credit spreads at the time of default, and the market-to-book ratio of the firm and its industry prior to default. Seniority and security are the two most important influences, followed by debt cushion, leverage, and asset tangibility. Industry and macroeconomic factors are sometimes very strongly correlated with recovery rates.