Recovery Rate
The proportion of a defaulted debt's face value that creditors can expect to recover through bankruptcy proceedings or restructuring.
What is Recovery Rate?
The recovery rate is the fraction of the principal value of a defaulted debt that creditors ultimately receive after a bankruptcy or debt restructuring. It is expressed as a percentage of face value. Recovery rates vary significantly by the type of debt (senior secured vs. subordinated), the industry, and economic conditions. Historically, senior secured bonds have recovered 60–80% on average, while subordinated bonds recover 20–40%, and equity typically recovers nothing. The loss given default (LGD) equals 1 minus the recovery rate and is a key input in credit risk models. In credit default swap pricing, the standard assumed recovery rate is 40% (or 0.40). Actual recoveries are determined through lengthy bankruptcy proceedings and may take years to fully realize.
Example
When Hertz Global Holdings filed for bankruptcy in 2020, its senior secured creditors ultimately received close to full recovery as the company's vehicle fleet retained significant value. Junior creditors received less. However, in the case of Toys "R" Us, which liquidated rather than reorganized in 2018, even senior creditors recovered less than 50 cents on the dollar because retail store leases and inventory held little value in liquidation.