The determinants of bank loan recovery rates

We examine the factors that drive recovery rates on defaulted bank loans, using Moody's ultimate recovery database covering the 1987--2007 period. We identify four groups of prospective explanatory factors: 1) loan-related characteristics, 2) recovery process characteristics, 3) borrower-related characteristics, and 4) macroeconomic and industry conditions and the probability of default.;We find that a variety of loan contract features are strongly related to the ultimate payoff to creditors. Term loans recover less than revolving lines of credit. Secured loans have higher recoveries than unsecured ones and among the types of collateral, inventories and accounts receivable result in the highest recoveries. Bankruptcies resolved through a pre-petition reorganization plan produce higher actual settlements relative to other methods of default resolution. Loan recoveries have a convex relationship with the length of time to emergence. Recoveries initially decline and then increase as the time to resolution lengthens. Among the borrower characteristics examined, firm leverage before default negatively affects ultimate recoveries and firms with prior defaults yield higher final recoveries than first-time defaulters. Firm size influences recoveries differently across the two types of loans in the sample. Industry distress has a negative impact on settlement recovery rates and there is cross-sectional variation in recoveries across industries, other things equal. Improving macroeconomic conditions have a positive impact on recoveries. The probability of default at origination, proxied by the credit spread on the loan, is unrelated to ultimate recoveries.;We also examine how well the secondary market for bank loans anticipates ultimate settlement values and impounds these expectations into trading prices. Our findings suggest that 30-day post-default trading prices are highly correlated with settlement recoveries, but that trading prices are biased and inefficient predictors of ultimate recoveries.;KEY WORDS: Recovery Rates, Ultimate Recoveries, Loss Given Default, Credit Risk, Basel Accord...