Lenders recover “all or nothing” from defaulted borrowers
Banks recover 75% of defaulted debt owed by large corporate borrowers, according to new research.
Global Credit Data (GCD), jointly owned by 52 global banks, analysed large corporate borrowers (with more than €50mn turnover) marked as defaulted in bank loan books since 2004.
The data of 9,631 defaulted borrowers, 16,665 facilities and 52 lenders comprises only privately-held loans. The group claims its findings are the most precise analytics on loss given default (LGD), a key metric in banks’ credit risk modelling.
Analysis highlights an “all or nothing” trend in defaulted loan recoveries: when it comes to retrieving monies owed on each defaulted loan, banks tend to recover either most of the outstanding loan amount or close to zero.
Africa and the Middle East (grouped together) were found to have comparatively low LGDs as a result of the lower number of overall defaults in the region, with the inverse true of Asia and Oceania (also grouped together). Falling between the two groupings, both North America and Europe have similar levels of LGD, time to resolution and time to recovery compared to other regions.
Looking to the loan types, secured LGD was – unsurprisingly – lower than unsecured LGD, supporting established banking theory behind policies of taking collateral on loans.
Collateral plays a significant role. Secured LGD is lower than unsecured LGD: 23% vs 28% on obligor level; 23% vs 26% on obligation level.
Taking collateral out of the picture and reviewing unsecured LGD only, the analysts confirm seniority as a driver at obligor level: 27% senior vs 40% subordinated. Data shows the effect is slightly less on obligation level: 26% vs 37%.
“The LGD Report 2018 finally provides the statistical data to underpin the principle that seniority of debt and collateral have a central role to play in ensuring minimal loss in the case of a default,” says Nina Brumma, head of analytics and research at GCD. “Consistently over time, secured LGD is lower than unsecured LGD, while senior unsecured defaults have a significantly lower LGD than subordinated unsecured defaults.”
The study also indicates a correlation between economic conditions and loan recoveries: for instance, a considerable spike in the total number of defaulted borrowers is recorded during the financial crisis of 2008-09.
The LGDs in the report are cash flow discounted observations of historic data. The long-term average LGD levels can therefore be compared with regulatory minima and standardised levels but are not forward-looking estimates.take me back