Defaulted bonds lose 79 cents on dollar-Moody's
February 26, 2002 1:22:00 PM ET
NEW YORK, Feb 26 (Reuters) - Bondholders of Enron Corp., Global Crossing Ltd. and dozens of other companies that went bankrupt now have one more thing to worry about: If they are like other holders of defaulted debt, they may get very little of their money back.
Moody's Investors Service said in a report released on Tuesday that holders of bonds that went into default were able last year to recover only 21 cents on the dollar, a record low.
That's down from 25 cents on the dollar in 2000, and below the 27-cent trough in 1990, when the U.S. economy last entered recession. It's also barely half the average recovery over the last 20 years.
Last year's decline came in a record-setting year for defaults, when 212 rated companies defaulted on $135.1 billion of debt, and the default rate for "junk" bond issuers reached 10.2 percent, a 10-year high.
"The fact that recoveries are low when the default rate is high suggests that credit losses on a bond portfolio will be most severe exactly when they are most likely to happen," said David Hamilton, Moody's director of default research, in a press statement.
Moody's said last year's largest U.S. corporate bond defaults came from energy trader Enron, with $9.9 billion; Finova Capital Corp., a unit of lender Finova Group Inc. (FNV), with $6.3 billion; PG&E Corp. (PCG) utility unit Pacific Gas & Electric Co., with $5 billion, and voice and data services company XO Communications Inc. (XOXO), with $4.9 billion.
Enron, Finova and Pacific Gas filed for bankruptcy protection. A report in Business Week magazine said XO expects to follow suit by the end of next week.
Moody's said in the report that recovery rates are important because regulatory bodies rely on them to assess how much capital lenders, such as banks, should have, and because "distressed debt" investors use them in assessing risk.
In 2001, Moody's said, holders of senior secured bonds that went into default recovered about 58 cents on the dollar, while holders of senior unsecured bonds recovered 36.2 cents, senior subordinated bonds 19.9 cents, and other subordinated bonds just 16.5 cents.
Moody's said that over the last 20 years, bondholders of companies with "investment-grade" ratings of "Baa3" or higher one year before default recover 13 to 49 percent more than bondholders of companies with "junk" ratings of "Ba1" or lower.
The credit rating agency expects the default rate to drop to 6.8 percent by year end, because many companies that came to market between 1997 and 1999, when it was easy to obtain capital, have already defaulted. REUTERS
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