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Fitch Ratings-New York-07 July 2009: Recovery rates on defaulted U.S. bonds and loans have dropped sharply in 2009, averaging just 21.8% and 57.5%, respectively, according to a new Fitch Ratings study. This occurred as the U.S. high yield default rate - which a year ago stood at just 2.4% on an annual basis - soared to 9.5% in the first six months of 2009.

'The weak economy and still difficult funding conditions are having an unwelcome dual negative effect on credit losses - driving up corporate defaults and simultaneously depressing recovery rates,' said Mariarosa Verde, Managing Director and Head of Fitch Credit Market Research.

Fitch's report, titled 'Defaults Surge, Recoveries Sink in 2009: Understanding the Fundamental and Cyclical Drivers of Corporate Recovery Rates', discusses the many complex variables that influence corporate recovery rates, offering a multidimensional view of recovery rates - default to emergence, market price to bankruptcy resolution, firm value to debt instrument and peak to trough. Companies in Fitch's study that defaulted and filed for bankruptcy from 2000-2006 on average emerged from bankruptcy with just 35% of their pre-bankruptcy debt and 53% of their pre-bankruptcy asset value.


Aggressive underwriting in the leveraged finance market from 2005-2007, for example, is playing a role in current recovery trends, especially with respect to loans. Loan recovery rates in 2009 are running well below historical levels, even lower than those associated with the 2001-2002 period.

In the study, Fitch also discusses the relationship between the three main measures of recovery; the 30-day post default price, the price of the pre-petition instruments at emergence from bankruptcy and recovery outcomes from actual bankruptcy documents.

'The average 30-day price of defaulted bonds and loans from 2000-2006 was 31% and 72% of par, respectively, for companies in Fitch's study,' said Eric Rosenthal, Senior Director of Fitch Credit Market Research. 'At emergence, the same bonds and loans traded at 41% and 81% of par, respectively.'

Fitch also examines recovery rates in 2009 relative to the trading prices of the defaulted bonds at the beginning of the year.

Market prices fell so precipitously in the last turbulent quarter of 2008 that on a mark-to-market basis defaults in the first part of 2009 have resulted in limited incremental losses. Fitch finds that while the average bond recovery rate through May was just 21.8% of par, at the beginning of the year the same bonds were already trading at a very low 25% of par.

Fitch believes that defaults and grim recovery rates will not ease in 2009. The U.S. high yield default rate is expected to end the year in a range of 15% to 18%.

The new study is available on Fitch's web site at '' under the Credit Market Research Link.

And additional tidbits after reading The banking backdrop for 2009  and Welcome to the Big Bank Bamboozle!: (I am adding additional bank shorts to my portfolio, primarily due to the ridiculous run up in pricing, which has created new opportunities. The requisite research will be published to subscribers within a couple of weeks)