- There were few defaults or restructurings of European corporate debt instruments in 2019, meaning minimal changes to the mean and median recovery rates for 2003-2019 versus 2003-2018.
- The mean recovery on first-lien debt has dropped a little, to 72.7% in 2003-2019 from 73.4% in 2003-2018 and 74.7% in 2003-2017, with the number of defaults on first-lien bonds gradually increasing, but no new defaults on second-lien or mezzanine debt.
- At 67.2%, the average first-lien recovery in the U.K. remains lower than the overall average of 72.7%, consistent with the weakening economic environment in the U.K.
- The retail and restaurant and media and entertainment sectors have lower average recoveries and are the ones to watch in future.
In this ninth edition of S&P Global Ratings' empirical study of European defaulted corporate debt instruments, we look at the recovery performance of 1,354 instruments over a 16-year period from 2003 to 2019. We see this as a useful benchmark, especially as our default rate assumptions for 2020 have risen to double digits, increasing focus on the expected recovery rates. At the time of default, the issuers of these debt instruments had either an issuer credit rating or a credit estimate from S&P Global Ratings. The face value of these debt instruments increased to $250 billion from $239 billion (2003-2019). Our methodology for this report is unchanged from the eighth edition, and is largely the same as that of our LossStats database (see the methodology in the appendix).
As there were only a few defaults or restructurings in 2019, our data set has increased by just 41 to 1,354 defaulted debt instruments on which we have observed recoveries. The 41 defaulted debt instruments were from 13 issuers and comprised 20 secured and 21 unsecured instruments, with an almost equal number of bonds and bank facilities. These 13 issuers comprised five issuers from each of France and the U.K., and one from each of the Netherlands, Belgium, and Ireland. This is unsurprising as these countries have the highest percentages of total issuance. The retail and restaurant sector had the most defaults, followed by the capital goods sector.
Despite the small increase in the number of defaulted instruments, the average recovery for the first-lien debt decreased by 70 basis points to 72.7% in 2003-2019 from 73.4% in 2003-2018, with a significantly lower average recovery of 58% in 2019. For the unsecured debt, the average recovery rate was 32%. However, given the small increase in the number of defaulted instruments in 2019, the overall mean and medians for 2003-2019 have only changed minimally from the 2003-2018 figures.
While the headline numbers remain strong, the story could be significantly different in the next couple of years, as a huge number of defaults could follow in the wake of the COVID-19 pandemic. We expect recoveries in this cycle to be materially lower. Our forecast of the average recovery rate for the first-lien debt we currently rate is around 58.0%, which is well below the 72.7% average we have recorded historically. (See "European Leveraged Finance And Recovery Second Quarter 2020 Update: Finding Equilibrium," published July 20, 2020, for statistics on our current European recovery ratings).
S&P Global Ratings expects the European trailing-12-month speculative-grade corporate default rate to rise to 8.5% by March 2021, according to the report published on June 8 titled "The European Speculative-Grade Corporate Default Rate Could Reach 8.5% By March 2021." To reach this baseline forecast, 62 speculative-grade companies would need to default.
|2003-2019 Recovery Data Snapshot|
|Instrument||Instrument count||Increase in number of instruments||Average recovery (% par)||Standard deviation (%)||Median recovery (% par)|
|Source: S&P Global Ratings.|
First-Lien Recoveries By Volumes And Value
In Europe, nearly 44% of first-lien instrument lenders recovered 90%-100% of their initial investment, with around 6% recovering 0%-20% (see chart 1). This equates to 414 of 939 instruments. However, the recoveries by value are skewed downward, mainly by some high-value transactions, as well as by the significantly lower recoveries on bonds(49%).
Unsurprisingly, a large proportion of first-lien lenders get full recovery, with the remainder seeing a wide spread of recoveries between 30% and 90%. By value, lenders of nearly 53% of the first-lien debt recover over 70%.
All the issuers that emerged from restructurings, bankruptcy, or distressed exchanges in 2019 had bonds in their structures. Although it is too early to call this a trend, it does appear to be one of the main reasons for the lower recoveries on these companies' defaulted debt.
|First-Lien Recovery By Country|
|Top seven countries, contributing 89% of the data set (by number)|
|Number of instruments||Percentage of total number of first-lien instruments (939)||Average recovery (% par)||Standard deviation|
|Source: S&P Global Ratings.|
First-Lien Recovery By Industry
The variation in recoveries in individual sectors is quite high, making it difficult to establish a consistent correlation between industries and recovery rates on defaulted instruments. The retail and restaurant and media and entertainment sectors have a lower recovery rate than the overall average of 72.7%. In contrast, the business equipment and services sector continues to have a significantly higher recovery rate than the average.
The retail and restaurant and media and entertainment sectors could be among the most vulnerable in the coming few quarters, with the potential for high default rates across a high number of instruments. During 2009-2011, these sectors had more defaulted instruments than in any other sector. The recovery percentage was still more than 75% for both sectors in this period, although the situation during the financial crisis of 2008 was considerably different, as it could be now.
The automotive, telecommunications, utility, high technology, and oil and gas sectors display the lowest recovery rates for first-lien instruments, all rates being below 60% (see chart 3). Yet there is some consolation in that the number of defaulted instruments is low in most of these sectors.
In many sectors, there are too few defaults for them to be statistically meaningful. Furthermore, the data set counts each tranche of debt separately, meaning that five defaults in a sector could, for example, relate to just one company.
First-Lien Recovery By Country
The trend of 2003-2018 continues, with the top five countries by volume of defaults--the U.K., France, Germany, Spain, and Italy--accounting for 81% of defaulted instruments by number of tranches. This is what we would expect, as these countries are also the jurisdictions with the highest percentages of total issuance. These five countries, together with Belgium and the Netherlands, account for nearly 90% of all defaulted tranches in Europe from 2003 to 2019.
The average recovery rate on first-lien debt in the U.K. reduced to 67.2% in 2003-2019 from 68.8% in 2003-2018, led by significantly lower recoveries from New Look Retail Group Ltd. and another confidentially rated company. The U.K. has the lowest recovery percentage among the jurisdictions we rank in group A. This brings the overall recovery percentage down, as the U.K. also has the highest number of defaulted instruments. After the U.K., Germany, and France, the next largest number of defaults is in Spain, where the average recovery of 69.7% is slightly above the U.K. rate.
The average first-lien recovery rate of 74.0% in France is higher than the overall average of 72.7%. This is consistent with the upward revision of our jurisdiction ranking assessment for France to group A from group B in January 2016. For details on the factors we use in our jurisdiction ranking assessments, see "Methodology: Jurisdiction Ranking Assessments," published Jan. 20, 2016.
First-Lien Recovery By Year Of Default And Emergence Year
A low incidence of defaults does not appear to correlate to higher recoveries in the event of a default. First-lien recoveries continue to fluctuate from year to year, being relatively strong following the 2008-2009 financial crisis, but slightly weaker in the past two years (see chart 5). We expect that recoveries will remain lower in 2020, given the economic weakness and our expectation that the capital markets will remain largely inactive.
However, in future years, we might look to the recovery rate during 2009-2012, when we saw a stronger and statistically meaningful recovery rate on a higher number of instruments.
Super Senior Revolving Credit Facilities (RCFs) Have Higher Recoveries Than Pari Passu RCFs
There are few examples of defaulted super senior RCFs. These defaults have typically, but not always, resulted in 100% recovery. This performance is superior to that of RCFs that rank pari passu with the other senior debt. Although limited, this empirical evidence supports our typical assumption of an 85% utilization rate for RCFs in the hypothetical default scenario we use to calculate recovery rates. So far in 2020, we have observed a large number of companies at risk of default drawing 100% of their RCFs. In these cases, we update our specific recovery assumptions to account for the 100% drawdown.
|2019 Recovery Data Snapshot|
|Issuer||Process||Country||Sector||Instrument||Par value (mil. $ equivalent)||Recovery (% par value)|
Novasep Holding S.A.S.
|Nonbankruptcy restructuring||France||Health care||Senior unsecured bonds (PIK)||206||97%|
|Nonbankruptcy restructuring||France||Retail/restaurants||Senior secured bonds||374||32%|
syncreon Group Holdings B.V.
|Distressed exchange||Netherlands||Business equipment and services||Term loan||340||35%|
|Senior unsecured bonds||225||0%|
New Look Retail Group Ltd.
|Nonbankruptcy restructuring||U.K.||Retail/restaurants||Revolving credit||131||100%|
|Senior secured bonds||1,343||23%|
|Senior unsecured bonds||231||0%|
|Bankruptcy||Belgium||Metals, mining, and steel||Term loan||797||100%|
|Senior unsecured bonds||1,084||32%|
|Nonbankruptcy restructuring||France||Retail/restaurants||Senior secured bonds||557||0%|
PIZZAEXPRESS FINANCING 1 PLC
|Distressed exchange||U.K.||Retail/restaurants||Senior unsecured bonds||95||35%|
|Distressed exchange||Ireland||Health care||Senior unsecured bonds||490||50%|
Thomas Cook Group PLC
|Bankruptcy||U.K.||Transportation||Senior unsecured bonds||1,084||5%|
Galapagos Holding S.A.
|Nonbankruptcy restructuring||U.K.||Capital goods||Revolving credit||72||100%|
|Senior secured bonds||376||100%|
|Senior unsecured bonds||282||0%|
|Source: S&P Global Ratings.|
|Recovery Comparison Of Pari Passu RCFs Versus Super Senior RCFs|
|No. of instruments||Average recovery (% par)||Median recovery (% par)||Standard deviation (%)|
|Super senior RCF||14||92.8||100||26.71|
|RCF--Revolving credit facility. Source: S&P Global Ratings.|
A credit estimate (CE) is a confidential indication of the likely issuer credit rating on an unrated entity commissioned by and provided to a collateralized loan obligation manager to be used only in a portfolio context. The CE is based on input from a variety of sources and an abbreviated methodology that draws on analytical experience and sector knowledge of S&P Global Ratings analysts. CEs do not involve direct contact with management or in-depth insight into operating, financial, or strategic issues that such contact allows.
We define recoveries as the ultimate recovery rates following emergence from three types of default: bankruptcy filings, distressed exchanges, and nonbankruptcy restructurings. Unless specified otherwise, we look at recoveries at the instrument level. Recoveries are the value that creditors receive on defaulted debt. Companies that have defaulted and moved into bankruptcy will usually either emerge from the bankruptcy or will be liquidated. On emergence from bankruptcy, creditors often receive a cash settlement, new instruments (possibly debt or equity), assets, or proceeds from the sale of assets, or some combination.
Specifically for European recovery analysis and the data set, we use the concept of "interim recovery." This occurs when the defaulted instrument is converted to, or exchanged for, a new instrument with a new maturity date. If there is no reliable trading price, we assume that this new instrument is valued at par.
This is one of the key differences between the methodology of the European study and that of the studies conducted in the U.S. The U.S. secondary debt market is more transparent in many cases, and secondary trading prices are more readily available. In general, if no trading price is available, the case would normally be excluded from the U.S. data set. The other key difference between the U.S. and European methodologies is in the valuation of equity, as we discuss in further detail below.
Ultimate recovery is the value of the settlement a lender receives by holding an instrument through its emergence from default. The recovery is the amount received in the settlement divided by the principal default amount. Within our LossStats database, we use three recovery valuation methods (trading price at emergence, settlement pricing, and liquidity event pricing; see "Equity valuation" below) to calculate ultimate recovery.
Default types: Distressed exchanges versus nonbankruptcy restructurings
Our criteria define a distressed exchange offer as a situation whereby some or all of an issue is either repurchased for an amount of cash or replaced with another instrument (see "Understanding S&P Global Ratings' Rating Definitions," June 3, 2009). It is an exchange for one or another issue, whereas a nonbankruptcy restructuring can encompass a mixture of elements in the exchange.
Senior unsecured debt
We classify instruments as senior unsecured when the legal documentation describes them as such.
We classify the following debt instruments as subordinated: convertible bond, lower-priority ranking bank debt, and unsecured bonds that are not classified as senior in their documentation. For all but the unsecured bank debt, which is not common in the U.S., the classification of these instruments is the same in Europe and the U.S.
In Europe, new equity received as a result of a restructuring or distressed exchange is assumed to have zero value, unless a transparent and liquid trading price is available. For many U.S. insolvencies, by comparison, the equity will have either a reliable trading price or a court-agreed value.
Trading price at emergence. We can determine the recovery value of an instrument by using the trading price or market value of the prepetition debt instruments upon emergence from bankruptcy. Of the three methodologies, this is generally the most readily available because most debt instruments continue to trade during bankruptcy proceedings.
Settlement pricing. The settlement pricing includes the earliest public market values of the new instruments that a debtholder receives in exchange for the prepetition instruments. It's similar to the trading price method, except that it's applied to the new (settlement) instrument instead of the old (prepetition) instrument.
Liquidity-event pricing. The liquidity event price is the final cash value of the new instruments or cash from the sale of assets that the lender acquires in exchange for the prepetition instrument.
Recovery rating at origination
For origination recovery ratings, if the origination date preceded our June 2007 rollout of recovery ratings on secured debt (March 2008 for unsecured debt) under the revised recovery rating scale, then we would use the recovery rating first assigned under the revised scale. For example, if a rated company was originally assigned recovery ratings in 2006, we would then use the recovery ratings assigned in June 2007 under the revised scale. Alternatively, if a company completed a major recapitalization in September 2009, we would use the recovery ratings assigned at that time as the original recovery ratings, since it would require a full reassessment of recovery based on the new capital structure. If the same company completed relatively small add-on debt issuances, we would continue to use September 2009 as the origination point.
Recovery rating at default
For default recovery ratings, we use the most recent recovery rating assigned at the time of default, preferably the most recent rating immediately preceding the default.
Actual debt outstanding
Actual debt outstanding reflects the prepetition debt claim of the debt instruments or class of debt. We note that bankruptcy documents vary in terms of detailing prepetition principal outstanding and the prepetition interest outstanding. As a result, the actual debt outstanding amounts in our study are an estimated amount. In a majority of cases, this amount consists of actual prepetition principal and interest, while in other cases it reflects only actual prepetition principal outstanding.
We define the effective interest rate as the prepetition rate at the time the last coupon was paid. For fixed-coupon instruments, this is the fixed rate; and for floating-rate instruments, it's the floating rate used at the time of default. We also record nominal recovery rates, which are the non-discounted values received at settlement.
- Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
- Understanding S&P Global Ratings' Rating Definitions, June 3, 2009
This report does not constitute a rating action.
|Primary Credit Analyst:||David W Gillmor, London (44) 20-7176-3673;|
|Secondary Contact:||Marta Stojanova, London + 44 20 7176 0476;|
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