Distressed syndicated bank loans recovered an average of 82% of their value, compared with the 42% average recovery for bonds of the same companies, according to a study.
It found that loans remained in distress an average of 19 months before they either defaulted or recovered.
But not all loans fare equally. Loans to building materials and construction companies did the best, recovering an average of 112% of their value, including accrued interest. Loans to specialty retailers did the worst, recovering only 56% of their value on average, according to the study by Fitch Investors Service released Friday.
Industries that recovered the most value are those "where the companies had a really big, solid franchise, hard assets, and not that many assets pledged out to other creditors," said Robert J. Grossman, executive vice president and head of the loan products group at Fitch.
Companies that had low levels of hard assets, a high level of assets already pledged to other creditors, and significant levels of obsolescence risk recovered less value.
For example, energy companies with hard assets that retain much of their value - such as a power generation plant or oil - and strong franchises recovered an average of 106% of par value.
But specialty retailers whose inventory may fall out of fashion or become obsolete quickly, recovered an average of only 56%.
"While general economic conditions can impact ultimate recovery, the unique characteristics of each company and industry are the primary determinants," according to the study.
The study used data from Loan Pricing Corp. on the 60 broadly syndicated loans in 12 industries that were classified as distressed-those loans trading on the secondary market at 80% or less of par value-in the six years ended June 30.
Information on recovery rates has long been a key to valuation in the bond market and was an important factor in the growth of the asset-backed securities markets for mortgages, auto loans, and credit card debt, said Mr. Grossman.
But the current convergence between the bank loan and high-yield bond markets and the influx of institutional investors into the loan market has greatly increased the need for reliable data on not just loan recoveries, but the relative value of loans and bonds of distressed issuers.
The study "provides further evidence of one of the key investment characteristics of senior secured corporate bank loans as an asset class, namely the relative value contributed by the position in the capital structure and the collateral," said Elliot Asarnow, a managing director with ING Capital Advisors Inc., which specializes in floating-rate corporate loan products for institutional investors.
Managers of portfolios investing in both bonds and loans, as well as managers of collateralized loan and bond obligations, need data on recoveries to compare the risk characteristics and value of bonds and loans.
"Until this stopped being a buy-and-hold industry and became a syndicate-and-sell industry, this information wasn't all that important, and the huge amount of time and energy and money necessary to create it probably wasn't worth it," said David Keisman, a principal of Portfolio Management Data LLC, which is affiliated with Standard & Poor's.
Moody's Investor Service and Standard & Poor's have previously issued studies of loan recovery rates, but neither have specified recovery averages for particular industries.
