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Junk bond market, you’re the only hope

June 19, 2009

Ok, that may be overstating it, but Fitch Ratings released a report on leverage loan recovery ratings – ie how much loan holders can expect to get back should a company default and the findings are hardly surprising: many investors can expect to get back less than they had thought when they invested in this secured debt.

RR1 means investors can expect a recovery of 90-100%, and RR6 0-10%.

loanrecoveries

A big reason for this is there’s often a lack of unsecured junk bonds below the leverage loans to absorb losses in case of default – another symptom of the boom time.

But with unsecured junk bonds the flavor of the year – up nearly 40% in the last year – there’s hope that at least some companies with heavy dollops of leverage loans outstanding will be able to refinance them into junk bonds rather than default. That could at least slow the deterioration recovery rates.

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