Market Size and Investment Performance of Defaulted Bonds and Bank Loans: 1987-2001
NYU Salomon Center Working Paper No. S-02-5
Posted: 3 Mar 2003
Date Written: January 2002
The defaulted and distressed, public and private debt markets in the United States swelled to a record $680 billion (face value) at the end of 2001. The market value of this "niche" segment was approximately $400 billion.
Defaulted security investors enjoyed an excellent year on average, as returns in 2001 were 17.5% on bonds, 13.9% on bank loans, and 15.6% combined defaulted public bonds and private bank loans.
The Altman-New York University Salomon Center Index of Defaulted Bonds grew to over 200 individual issues and a face value of $56.2 billion; the market value was only $11.8 billion. The market-to-face value ratio of the Bond Index grew somewhat to 0.21 from 0.15 one year ago, but remained at a relatively low figure. The face value of our Defaulted Bank Loan Index also grew to $44.7 billion and the market-to-face value ratio remained quite low at 0.53.
The recovery rate on defaulted bonds (price just after default) was very low at 25 cents on the dollar; likewise, the bank loan recovery rate in 2001 was also relatively low at 55 cents on the dollar. With new defaulted bonds rising in 2001 to a record $63.6 billion (default rate of 9.80%) and the default outlook for 2002 high, but lower than for 2001 investment opportunities should abound in the distressed debt market.
Indications are that distressed investors (both old and new) are successfully raising funds because investor expectations are buoyant.
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