Heavy Bank Loan Issuance May Cut Recoveries as U.S. Corporate Defaults Rise - Special Comment - 2008/09/23 - Moody's Global Credit Research

Report title: Heavy Bank Loan Issuance May Cut Recoveries as U.S. Corporate Defaults Rise

from Moody's Global Credit Research
6 page (2782 word) report published Sep 23, 2008

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...A word of caution to investors in bank loans extended to corporate issuers during the last credit boom: recoveries on the next round of defaulted bank debt could be far lower than historic averages. Bank loans typically offer investors a safe haven when a company defaults on its debt. Layers of subordinated debt absorb losses first, cushioning investors in bank loans. During the last 20 years, this preferred position has enabled bank loan investors to recover an average of 81% (81 cents on the dollar) in default situations, compared with 29% for the lowest tiers of debt. Investors expecting history to repeat itself during the current upswing in corporate defaults could be surprised by recovery rates of 60% or lower for bank debt in companies that default with capital structures comprised entirely of bank debt. Bank-only deals constituted a majority of leveraged financings in recent years, which could have a significant effect on the recovery rates for bank debt in the next default cycle....

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Moody's Investors Service, a leading global credit rating, research and risk analysis firm, publishes credit opinions, research, and ratings on fixed-income securities, issuers of securities and other credit obligations. Credit ratings and research help investors analyze the credit risks associated with fixed-income securities. Ratings also create efficiencies in fixed-income markets and similar obligations, such as insurance and derivatives, by providing reliable, credible, and independent assessments of credit risk. For issuers, Moody's services increase market liquidity and may reduce transaction costs.

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