Recovery Rate
Candlefocus EditorThe determination of recovery rate isn't a simple task, due to the fact that it is based on the real or expected value of assets that may go through bankruptcy proceedings. This means that the value of assets can be changed due to different circumstances during the bankruptcy proceedings, and as such recovery rate has to be determined in a particular case. A number of factors can influence the recovery rate, such as the size of the estate and any preferential interests that may be attached to various creditors. Another major factor can be the ability of the bankruptcy estate to successfully liquidate or reorganize the assets.
The recovery rate is the focus of keen interest following the vast amount of defaults after the 2008 financial crisis. During that year the average recovery rate for senior unsecured bonds dropped from 53.3% in 2007 to 33.8% in 2008. This significant decrease in recovery rate indicates an alarming increase in the levels of consumer defaults.
In general, creditors tend to prefer higher recovery rates; however, that doesn’t mean that a lower rate should be avoided. As long as the creditors are confident of their investment and the accompanying recovery rate, then lower rates can be considered advantageous for the creditor, given that a low recovery rate may lead to higher returns than a higher rate with an inadequately structured estate.
Overall, recovery rate is an important factor in calculating the amount of money that creditors are likely to receive in the event of a default and can have dramatic effects on the amount of money creditors will get in the case of a default. A careful analysis of the ability of bankruptcy estate to successfully liquidate and reorganize assets is essential in order to calculate the appropriate recovery rate. Furthermore, the recovery rate should always be considered with the understanding that it may vary due to economic conditions or simply due to the incompetence of an estate to successfully liquidate or reorganize assets.