Creditor recovery: The macroeconomic dependence of industry equilibrium

• State of economy drives asset liquidation values and therefore recovery rates.
• Macroeconomic effects induce industry downturns and possible distress.
• Industries whose sales are more correlated with GDP recover less during recessions.
• Industries more dependent on external finance recover less when stock market falls.
• Provides a framework for macroeconomic stress testing of corporate credit.

This paper reconciles the state of the economy with industry conditions in driving asset liquidation values and, therefore, recovery rates on defaulted debt securities. Evidence to date downplays the economywide effect in favor of industry and debt characteristic explanations. This paper shows that macroeconomic effects are important but operate differentially at the industry level. Industries whose sales growth is more correlated with GDP growth recover less during recessions. And industries that are more dependent on external finance recover less when the stock market falls. These findings expose how economywide shocks are transmitted to industry downturns, providing a framework for the role of aggregate risk in recovery risk and for macroeconomic stress testing.