It is practically impossible to accurately predict the recovery rates. There are various factors that will affect the recovery rates of a defaulted loan:
- Collateral: The higher the value of collateral, the higher will be the recovery rate, as the sale of collateral will be able to payoff more creditors.
- Priority class of the claim: The recovery rates are affected by the priority class of the claim. This is because most bankruptcy procedures settle the claims based on the seniority of the class. The highest recovery rates are observed in the senior secured class and the lowest rates are observed in the junior subordinated debt.
- The bankruptcy procedure used: The backruptcy procedure will also affect the recovery rates. The UK bankruptcy procedures tend to be more favourable towards creditors, while the procedures in USA and France are more friendly towards the obligor. Accordingly, the UK will observe higher recovery rates compared to US and France.
