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USA: Recovery analysis in spotlight as defaults soar
Source: Reuters
Date: March 18, 2003
Author: Dena Aubin
NEW YORK, March 18 (Reuters) - Investors bloodied by a recent wave of debt defaults are getting more offers of help from rating agencies and risk professionals with ways to limit future losses.
Moody's KMV, a risk management unit of the credit rating agency Moody's Corp. (MCO.N), is marketing its LossCalc computer model to estimate losses in the event of a default, while rival Standard & Poor's said it is looking at adding recovery estimates to some of its bond ratings, likely starting with the "distressed" portion of the market.
Fitch Ratings said it will begin incorporating recent data on recoveries to refine ratings on most of its speculative-grade corporate bonds.
"The bad news is there have been an awful of bond defaults over the last two and one-half years," said Bob Grossman, managing director at Fitch Ratings. "The good news is we have much more information about industry performance."
The focus on recovery rates comes after investors worldwide were hit with more than $170 billion of bond defaults last year, the largest dollar volume ever, according to Moody's. Even as defaults soared in recent years, investors also were losing more money on defaulted bonds as overcapacity in a wide swath of industries caused collateral values to tumble.
Losses on senior unsecured industrial bonds could reach 62.9 percent over the next 12 months, up from a historical average of 46.9 percent, according to KMV.
BANK LOANS SOUR
"The fact that the economy is in much worse shape than it was a few years ago is one factor, and you have firms that are more leveraged, which is also driving it," said Jeff Bohn, managing director at Moody's KMV.
In the airline sector, a protracted slump in travel has caused the market value of aircraft to plummet, hurting recovery prospects as airlines default and more bankruptcies loom.
LossCalc was sounding the alarm on poor recovery prospects for airline debt as early as a year ago, Bohn said.
Many investors have relied on historical averages to judge recovery prospects, but LossCalc is designed to give a forward-looking estimate of recoveries, Bohn said. It does that by looking at each company's size, leverage and type of debt on its balance sheet, plus such broader factors as expected default rates and changes in leading economic indicators, he said.
The product has been available since last year but is now being combined with KMV's portfolio management software to make it easier to use, Bohn said.
Not surprisingly, commercial banks are some of the biggest users of LossCalc. Last year, the number of large business loans at banks in default or showing symptoms of stress soared 34 percent to $236.1 billion, according to banking regulators.
FITCH TO REVAMP RATINGS
Rating agencies say that extensive records on defaults and ratings should help them better predict recovery rates. Moody's, for example, said it has ratings and default records on more than 16,000 corporate debt issuers that sold public debt since 1919. S&P has been providing recovery estimates since it began rating bank loans about six years ago and is now looking at expanding that to unsecured debt, said William Chew, a managing director.
Along with a rising number of defaults, the growth of credit default swaps and collateralized debt obligations have fueled interest in recovery estimates, Chew said. Collateralized debt obligations, a type of structured product backed by pools of bonds and loans, requires estimates of recovery rates for ratings, he said.
Fitch's Grossman said that rating agency expects to update its non-investment-grade ratings within two to three months based on new recovery data. The biggest changes will likely be wider rating differences between loans and bonds of the same company, he said.
Recovery rates on loans are higher than those on bonds because loans rank higher in the capital structure.
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