Recovery Rates in the Real World: 40 Years of Bond and Loan Default Data
Corporate Financial Distress, Restructuring, and Bankruptcy by Edward I. Altman, Edith Hotchkiss, and Wei Wang (Wiley, ISBN 978-1-119-48180-5)
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The second half of Chapter 16 is pure data. Altman and Kuehne’s NYU Salomon Center database covers more than 3,200 bond defaults since 1971 and hundreds of loan defaults since 1996. If you work in credit, distressed investing, or bank regulation, these numbers are the foundation.
The PD-RR correlation in practice
Frye’s theory checks out in the data. When default rates spike, recoveries fall:
| Year | Default Rate | Avg Recovery Price | Default Loss |
|---|---|---|---|
| 2002 | 12.79% | 25.3% | 10.15% |
| 2009 | 10.74% | 36.1% | 7.30% |
| 2007 | 0.51% | 66.6% | 0.19% |
| 2017 | 1.81% | 56.7% | 0.86% |
Over 1978-2017, the arithmetic average recovery rate on defaulted bonds was 45.88% (38.55% weighted). Default loss averaged 2.19% annually. But that average hides enormous cyclical swings.
Altman, Resti, and Sironi (2005) found that default rates alone explain 58-62% of recovery rate variation. Supply of defaulted paper exceeding demand in bad years drives prices down.
Bond recovery distribution
Most defaulted bonds recover between 0-50% of face value. The distribution is heavily skewed toward the low end. During recession periods, recoveries cluster in the 20-30% range.
Loan recoveries: higher but still cyclical
Loans recover more because they’re senior and often secured. The 1996-2017 sample of 766 loan defaults shows most recoveries in the 60-100% range. Average loan recoveries beat bonds, but loan recovery variability relative to the mean (0.52) is lower than bonds (0.74).
Recovery by seniority
The seniority ladder is clean and monotonic:
| Seniority | Mean Recovery |
|---|---|
| Senior secured | 59% |
| Senior unsecured | 46% |
| Senior subordinated | 36% |
| Subordinated | 32% |
| Discount/zero coupon | 19% |
Senior unsecured is the largest category in the sample. If you’re buying defaulted bonds, your seniority claim is the single most important variable.
Recovery by original rating
Investment-grade bonds that later default recover more than original junk bonds at the same seniority level:
- Senior secured IG: 54% mean vs. 49% for non-IG
- Senior unsecured IG: 42% mean vs. 37% for non-IG
Better balance sheets at issuance mean more assets left to fight over in bankruptcy.
Recovery by industry
Huge variation across sectors (1971-2017):
- Highest: Utilities (64%), miscellaneous (50%), financial services (48%)
- Lowest: Auto/motor carrier (23%), real estate/construction (30%), communications/media (31%)
- Middle: Most industries cluster at 35-45%
Energy recoveries dropped from 51.5% (through 2014) to 36.7% (through 2017) as the sector’s distress deepened.
Ultimate recovery vs. immediate recovery
Market prices right after default understate what creditors eventually receive. Moody’s Ultimate Recovery Database (1987-2018) tells the full story:
| Instrument | Nominal Ultimate Recovery | Discounted |
|---|---|---|
| Revolvers | 94% | 86% |
| Term loans | 81% | 74% |
| Senior secured bonds | 72% | 62% |
| Senior unsecured bonds | 55% | 48% |
| Senior subordinated | 33% | 29% |
| Subordinated bonds | 32% | 27% |
The gap between immediate and ultimate recovery is where distressed investors make (or lose) money during the restructuring period.
Distressed exchanges recover more
Out-of-court distressed exchanges averaged 57.0% recovery (1984-2017) vs. 44.4% for all defaults and 37.1% for non-distressed-exchange defaults. Bondholders need a premium to accept an exchange rather than gamble on bankruptcy.
But 35% of successful distressed exchanges eventually end up in Chapter 11 anyway.
Other factors that matter
Recent research adds more layers:
- Industry conditions at default are robust predictors (Acharya, Bharath, Srinivasan 2007)
- Bond liquidity affects recovery: illiquid bonds with high transaction costs recover less (Jankowitsch, Nagler, Subrahmanyam 2014)
- Bank loan share in capital structure predicts lower firm-level recovery (Carey and Gordy 2016)
- Covenants help lenders monitor and call default earlier
- Chapter 11 beats Chapter 7 for creditor recoveries (Bris, Welch, Zhu 2006)
The bottom line
Recovery rates aren’t a fixed input for your credit model. They’re cyclical, seniority-dependent, industry-specific, and negatively correlated with default rates. Models that treat PD and RR as independent will underestimate losses in bad years.
For distressed investors, the gap between immediate post-default prices and ultimate recovery at emergence is where returns get made. Senior unsecured bonds in the right credit cycle have historically been the sweet spot. Subordinated bonds have been wealth destroyers.
And when the next default wave hits, expect recoveries to drop 20-25 percentage points from their benign-cycle averages. Frye’s warning from 2000 still holds.
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