A study on corporate loan defaults show that banks can expect to recover 75 per cent of a defaulted loan but often recovery can be zero, according to data from 50+ banks by Global Credit Data (GCD). In fact, the bank is likely to face an 'all or nothing' scenario when trying to resolve and recover defaulted loans from large corporate borrowers (those with turnover greater than €50 million).
Economic cycles also have a significant impact on loan default and recover rates, while the average time it takes to resolve a defaulted loan is around two years. GCD's report found that whether loans were secured with collateral or unsecured also had a determining effect on the outcome of recovery after default, while the characteristics of the collateral (type, value of collateral and loan to value ratio) also strongly influence the outcome. The report found that that collateralised loans and obligors produce significantly lower LGD than unsecured loans and obligors. GCD notes that: “This outcome supports common bank lending policies which assume that the taking of collateral will improve the bank’s position versus unsecured creditors.”
GCD is a non-profit association owned its more than 50 member banks. The organisation has been collecting credit risk data from banks since 2004. By measuring the recovery rate of bank loans to large corporates, and also the losses, or loss-given default (LGD) rate, GCD says it has created “one of the world’s largest sources of information on all aspects of LGD modelling for wholesale lending”. It notes that it bases its figures on loans that have been defaulted upon, which represent approximately 1 per cent of total bank loans, rather on models for predicted defaults.
GCD underlines the following three observations about the study and its findings:
- Seniority and collateral are confirmed as LGD drivers (27 per cent senior unsecured vs 40 per cent subordinated unsecured at obligor level. The Total Secured LGD is 23 per cent).
- LGD varies over time, indicating that there is a relationship between the economic conditions and recoveries.
- Because GCD data comprises privately held loans, the data set differs from most other studies. Hence the outcome can be compared to, but should not be expected to be the same as, studies which focus on publicly recorded bond defaults, single country data or liquidation only data.
CTMfile take: This is the first report released by Global Credit Data using its comprehensive data set on defaulted loans to large corporates, from more than 50 banks worldwide. It covers defaults from a broad data set, from the year 2000 to 2014.
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