zerohedge.com / by Tyler Durden / Sep 12, 2016 8:00 PM
Back in March, this website first point out how the current default cycle is so different from previous ones: as we reported half a year ago, the key difference was that recovery rates of defaulted debt had plunged to record lows. JPM’s Peter Acciavatti confirmed as much, noting that “recovery rates in 2016 are extremely low… for high-yield bonds, the recovery rate YTD is 10.3% (10.5% senior secured and 0.5% senior subordinate), which is well below the 25-year annual average of 41.4%. Final recovery rates in 2015 for high-yield bonds were 25.2%, compared with recoveries of 48.1%, 52.7%, 53.2%, 48.6%, and 41.0% in full-years 2014, 2013, 2012, 2011, and 2010, respectively.”
The low recovery theme was also observed by credit guru, Edward Altman, who in an interview with Goldman’s Allison Nathan said that “we are expecting a higher default rate in 2016 and even 2017, then we would expect a lower recovery rate. Already in 2015, the recovery rate dropped dramatically relative to 2014 even though the default rate was below average; we saw a 33-34% recovery rate versus the historical average of 45%, measured as the price just after default. This is primarily due to the heavy concentration of energy companies whose recovery rates depend on their ability to liquidate their assets at reasonable prices, which in turn depends on the price of oil. Low oil prices have pushed recovery rates in the energy sector below 25% and even into the single digits for some companies. And that’s going to continue. So this year I expect recovery rates much below average, producing a double-whammy of high default rates and low recovery rates for credit investors.”
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