Analysis of data from a database of debt instruments from Moody’s Investors Service may yield helpful insights ahead of the next economic downturn. The data reveals how default types change over time, how recoveries differ depending on the instrument’s position in a company’s debt structure and whether private-equity ownership influences recovery rates.
Moody’s Ultimate Recovery Database traces close to 5,500 debt instruments from more than 1,100 defaulted U.S. companies whose total liabilities recently exceeded $1 trillion, the ratings agency said in a new report. The database spans the years from 1987 to the end of 2016 and includes U.S. nonfinancial corporate borrowers, both rated and unrated by Moody’s, that had more than $50 million in debt at the time of default.
“Our database includes information gathered during the 2008–2009 recession and shows that it featured a higher percentage of distressed exchanges than did previous downturns,” said Moody’s Vice President David Keisman. “Distressed exchanges accounted for about 15% of defaults between 1987 and 2007, but that figure has since risen to almost 50%.”
The data reinforces the importance of a debt instrument’s position in a company’s capital structure and the amount of debt cushion beneath it, with a positive correlation between debt cushion and ultimate recovery rates, Moody’s said.
“Recoveries are also influenced by current default rates, but industry rarely matters,” said Moody’s Associate Analyst Julia Chursin. “Losses are exacerbated during default peaks and are less pronounced during more benign credit cycles. On the other hand, there is relatively little variation in firm-wide recovery rates among industries, and so no observable relationship between the recovery rates of asset-heavy and asset-light industries.”
Private-equity ownership affects the type of default and the recoveries on certain kinds of debt, but has little influence on firm-wide recovery rates. Higher losses for junior creditors result from the prevalence of distressed exchanges, prepacks and bank debt in the liability structures of private-equity defaulters, Moody’s said.
– Adam Fusco, editorial associate