Fitch: Second Lien Recovery Rates Lower in Default Scenarios
Fitch Ratings said in a news release that a review of U.S. second lien debt recoveries in bankruptcies between 2004-2011 indicates lackluster recovery rates with wide disparities among individual issuers. Fitch based its analysis on 33 bankruptcies during this time period where second lien debt was present in the issuer capital structure.
The analysis indicated a 41% average recovery rate. This is only modestly higher than the 35.9% average U.S. recovery for defaulted unsecured debt and well below the first lien recovery rate of 82% in the sample. The presence of a second lien did not preclude heavy losses, Fitch said.
Fitch noted, however, that the 41% figure for average ultimate recovery on second lien claims is misleading as most second lien claimholders received either very superior or very poor recoveries. Ten of the 33 second lien facilities recovered 100% of par value, while 13 received distributions of less than 10% of par value. The seniority mix of debt and relative position of the second lien debt within a capital structure significantly affected recovery rates and also influences the recovery prospects of existing second lien issuers that have speculative grade Issuer Default Ratings.
While investors may be attracted to second lien debt for its secured status and return premium, they may also be disappointed by recovery rates well below first lien debt in defaults, Fitch said.
Fitch expects modest second-lien issuance volumes over the next several years, driven by refinancing needs and the ongoing, gradual re-emergence of less conservative lending standards. Some second lien volume is expected from issuers seeking to tap existing issuance capacity permitted via covenants or to rollover maturities at the same seniority level.
To read Fitch’s press release, click here.
To read the Fitch report, click here.