S&P: Lenders' unsecured bond recoveries sink following bankruptcies

By Caroline Salls

Pittsburgh, Aug. 6 - Lenders are recovering amounts far below par on senior unsecured bonds following some recent bankruptcy restructurings, according to a Standard & Poor's report titled "U.S. Recovery Study: Recent Post-Bankruptcy Recovery Levels Disappoint Senior Unsecured Bondholders."

S&P said recoveries averaged 33% from 2010 through May, significantly lower than the long-term average of 43%.

The agency said several senior unsecured bond instruments associated with issuers that recently emerged from bankruptcy, like General Maritime Corp. and Great Atlantic & Pacific Tea Co. (A&P), have generated recoveries of less than 5% of the principal amount.

According to the report, the average recovery level has dropped about 9% since the 2008-2009 recession and 13% since the economic heyday of 2003 to 2007.

The average recoveries for senior unsecured bonds have drifted lower since the easy credit years of 2003 to 2007, when they averaged 46%, S&P reported. During this time, the agency said the U.S. economy was expanding, market liquidity ran high and exit financing was plentiful and easily available.

S&P said the average declined slightly to 42% during the recessionary period of 2008-2009 before tumbling to 33% in the period from 2010 through May 2012 because of several factors, including the type of default, principal above the defaulted security and debt cushion, meaning debt outstanding below the defaulted security.

The agency said it does not believe that these declines constitute a trend yet.

Although these recoveries are below average, S&P said they are within a historically normal range.

In addition, S&P said it expects senior unsecured bond recoveries to revert closer to their historic average of 43% in the long term as the sample size increases.

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