The determinants of bank loan recovery rates

Using Moody's Ultimate Recovery Database, we estimate a model for bank loan recoveries using variables reflecting loan and borrower characteristics, industry and macroeconomic conditions, and several recovery process variables. We find that loan characteristics are more significant determinants of recovery rates than are borrower characteristics prior to default. Industry and macroeconomic conditions are relevant, as are prepackaged bankruptcy arrangements. We examine whether a commonly used proxy for recovery rates, the 30-day post-default trading price of the loan, represents an efficient estimate of actual recoveries and find that such a proxy is biased and inefficient.

► Firm leverage before default negatively affects ultimate recoveries, while borrower cash flow positions do not. ► Loans that are secured, especially by inventories and accounts receivable, have higher recoveries. ► Loans to borrowers with prior defaults yield higher recoveries than first-time defaults. Prepacks fetch higher recoveries. ► Loan recoveries vary nonlinearly with the time to emerge. Macroeconomic conditions significantly affect recovery rates. ► The 30-day post-default trading price of a loan represents a biased and inefficient estimate of actual recoveries.