Recovery rate

The proportion of a claim a creditor actually receives after a default, once the borrower's assets have been realised and distributed in rank order.

Example

With 150m available against 190m of unsecured claims, recovery is 150 / 190 = 78.95 cents in the dollar, so a 150m bond claim receives 118.42m.

Important

It is an assumption, not an observation, at the point you need it. Any break-even calculation built on a spread moves a long way with it, so state the assumption explicitly rather than letting a convenient one settle the answer.

Related terms

• Default — The failure of an issuer to meet a contracted obligation - a missed coupon, a missed principal repayment, or the breach of a term that permits creditors to demand repayment.
• Seniority — Where a particular claim sits in the queue for payment if the borrower fails. Secured claims are paid from their collateral first, then senior unsecured claims, then subordinated ones, with shareholders last.
• Credit spread — The difference between a bond's yield and that of a government bond of the same currency and maturity. It is the market's price for the default risk, the illiquidity and any adverse options the government bond does not carry.
• Credit risk — The risk that an issuer fails to make a contracted payment. It is the risk most associated with bonds and, for high-quality issuers, rarely the one that moves the price.

Lessons that explain it

• Four risks, an invisible dealing cost, and why interest is often the worst-taxed return — Credit, rates, inflation and liquidity are four separate risks that a single word - safe - is routinely used to dismiss. The tax treatment of interest is the one most holders never price at all. (12 min)
• Interest minus expected losses minus fees — A lending return is the interest collected, less the share of principal lost to defaults after recoveries, less fees. Expected loss is the number the headline rate leaves out. (12 min)
• Appraising one loan: what backs it, how thin the cushion is, and who collects — Evaluating a loan means asking how the borrower repays, what happens if they cannot, how far collateral could fall before you lose money, and how reliable the lender or platform is at recovery. (13 min)

All 578 terms in the Investing glossary