Investors in bank loans generally fare better after a bankruptcy than bond investors do, according to a study by Moody's Investors Service.

On average, the rating agency found, defaulted bank loans are worth 71 cents for every dollar of the original investment. Unsecured bonds are worth an average of only 46 cents, and subordinated bonds are worth 34 cents on the dollar, Moody's said.

The agency's economists, Lea Carty and Dana Lieberman, based their estimates on an analysis of the post-default secondary market pricing of syndicated loans to 58 companies that defaulted between 1989 and 1995.

Moody's has assigned ratings to about $165 million of syndicated loans since it began rating bank loans in April 1995.

The agency found that average loan recovery values were even higher among 229 defaulted bank loans studied by the economists. These loans had an average recovery value of 79%, and a median post-default recovery of 92%.

The economists attributed the disparity in part to the higher quality of loan collateral that tends to be assigned to bank loans.

The economists warned investors not to assume that all loans will perform better than bonds.

"The data show a tremendous dispersion in actual recovery values, so the probability is high that an individual loan's recovery rate will be much greater - or significantly less - than average," they wrote.

Post-default loan pricing ranged from 15 cents on the dollar to to 98 cents. Post-default cash flow ranged from zero to 100%. The wide dispersion in pricing and cash flow is due to the broad variations in the quality of the collateral as well as lender protections written into loan agreements.

Moody's said this dispersion weighed against using a process known as "notching," in which a loan's credit quality is assumed to be one notch higher than the credit rating on the same company's senior unsecured bonds.

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