Not investment advice. Educational reading. See Disclaimer.
L.4 · INTERMEDIATE · 2 MIN
Recovery Analysis: What Do You Get If They Default?
Recovery rate is the percentage of face value bondholders receive after a default. It depends on where you sit in the capital structure — seniority determines who gets paid first.
Recovery also depends on whether the company liquidates (sells assets piecemeal) or restructures (continues operating with reduced debt). Restructuring typically produces higher recoveries because going-concern value exceeds liquidation value.
§ 03Formula
Expected Loss = Probability of Default × (1 − Recovery Rate) × Exposure
§ 04Try it
Look up a company with outstanding bonds. Check whether the debt is secured or unsecured. Higher seniority means better recovery if things go wrong.
§ 05Check-in
A company defaults with $1B in senior secured debt and $500M in unsecured debt. Total asset value in liquidation is $800M. What do unsecured bondholders get?
§ 06Key insight
When analyzing bonds, always check what’s ahead of you in the capital structure. A seemingly attractive yield on unsecured debt may offer no recovery in a default if senior debt absorbs all the asset value.
§ 07Check-in
You own a senior-secured bond in a company that just filed for Chapter 11. Management estimates recovery of 80¢ on the dollar. What's the disciplined position?
Check your understanding
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Sit with the ideas.
A CCC-rated company has $1B in senior secured bonds and $500M in senior unsecured bonds. If it defaults with 50% total recovery, roughly how much do secured bondholders receive?
