Exactly one year ago (Jan 8, 2008) I wrote a piece Weak covenants as a cause of lower recovery rates in the near future! on ...the weak loan covenants in all kinds of loan arrangements... and on how this could lead to ...zombie firms... and ...much lower recovery rates!
I followed up (May 5, 2008) with Weak covenants as a cause of lower recovery rates in the near future! – Part II and how ...we might see a whole lot of sudden defaults, smaller as well as larger, in 2008 and 2009. And as a consequence of the cov-lites the recovery rate might be lower than the historical average...
Now, one of the directors of Moody’s says that he thinks recovery rates of loans as well as bonds will be less than half of the historical average (15% instead of 40% for loans and 50% instead of 85 % for bonds). FT wrote a piece on this the other day and they stressed Loose lending conditions....lets a struggling company continue operating longer before defaulting, sapping the value of assets.
Exactly what I have thought for more than a year now! OK, we are not there yet, but I certainly still think we will see a dramatic number of record-low-recovery defaults this year.