NEW YORK (MarketWatch) -- Bondholders are likely to recover less than normal if a company defaults on its debt because of a spike in the number of defaults and more difficulties for firms to find financing, Moody's Investors Service said.
Bondholders of non-financial company debt will likely recover between 35% and 40% of their investment in the current credit cycle, Moody's said in a report released Wednesday. That compares with recovery of about 50% over the last 20 years.
Trading in the bonds of some of the most high-risk companies' debt show that forecast may even be overly optimistic.
Moody's said the lower recovery rate will be partially attributable to a spike higher in default rates in the first place. The rating agency expects speculative-grade debt defaults to peak at 14.5% in the fourth quarter of 2009.
It's also lower than the 45% average in the last two recessions, which were shorter and shallower than the current one is expected to be, analysts said.
"The high default rate is the one we currently think is most likely to directly affect recovery rates," said analysts led by David Keisman. "As the amount of available defaulted debt and the number of defaulted companies rise in relation to demand from investors who buy distressed debt, it will tend to command a lower valuation in the marketplace."
Economic weakness and tight credit are also keeping a lid on valuations for distressed companies shedding assets, they said.
Recovery rates may be even lower on debt involved in distressed exchanged or prepackaged bankruptcies, because it is harder for companies to find debtor-in-possession financing.
Holders of General Motors (GMGMQ 0.62, +0.01, +0.82%) bonds are certainly expecting to recover a much smaller percentage in the company's pre-packaged bankruptcy, which is being financed by U.S. taxpayers.
GM's 8.375% bonds maturing in July 2003 currently trade around 13 cents on the dollar, which is actually up from as low as 5 cents last month when the outcome for bondholders was highly uncertain. Investors are only willing to hold the bonds at a deep discount to face value of 100 cents on the dollar.
Tight credit conditions may also make it harder for companies to find financing to emerge from Chapter 11, but that hasn't forced any liquidations yet, Moody's said.
Trading in Lear Corp's (LEA 1.17, -0.06, -4.88%) bonds show investors are expecting even lower recovery rates. The auto-parts supplier on Monday chose not to make a semi-annual interest payment, opting to use a grace period while it continues trying to restructure its capital.
Lear's 8.75% bonds due in December 2016 are trading around 27 cents on the dollar, according to high-yield bond specialist KDP Investment Advisors.
R.H. Donnelley's (RHDC 0.08, -.00, -5.06%) debt is even further in the dumps after the country's third largest print and online Yellow Pages publisher, filed for bankruptcy last Friday after years of growth through leveraged buyouts. See previous story on Donnelley filing.
