Ventodivino
מגן ולא יראה
Da JPM 2015
Historical guides of sovereign recovery rates
The recent lows in bond prices of Venezuela and PDVSA were around 30pts,
which would put them in line with sovereign recovery rates which involved
large principal haircuts. Sovereign bond restructurings since 1997 have usually
seen maturity extensions and coupon reductions, with principal haircuts not the
norm. There have been 27 sovereign default events since 1997, according to
Moody’s research12, which saw 36 sovereign bond restructurings. All but two
involved a maturity extension, with around 80% involving a reduction in coupon.
Only 45% saw a haircut on the principal, meaning this was not the norm. Given a
principal haircut is the quickest way to get debt/GDP levels lower, it is instructive
that these have not been the most common experience historically. This is likely to
do with the preference of countries not to have a disorderly or acrimonious default
involving large haircuts as they look at future market access. In fact, Moody’s found
that in 38% of cases the Debt/GDP ratio was higher after the restructuring13.
We think the single biggest question for recovery rate values has been whether
there have been principal haircuts. Moody’s estimates the average recovery rate
from 1983-2013 to be 49%14, although as Error! Reference source not
found.Figure 26 shows, this average does not appear to describe well the data
distribution which has largely fallen into two buckets: a) 20-40% recovery rate, and
b) >60% recovery rate. When we look more closely at the default events sorted in
ascending order by recovery rates in Table 14, it seems that the biggest factor
contributing to lower recovery rates is whether there were principal haircuts or not.
In fact, every example of recovery rates below 45 saw a principal haircut, and only
one case of recovery rates above 60 saw a principal haircut, only of 5 cents. This may
seem obvious, but actually coupons and maturity extensions can have large NPV
impacts as well. So the lows in Venezuela and PDVSA bond prices have implied a
high chance of default with a large haircut.
Historical guides of sovereign recovery rates
The recent lows in bond prices of Venezuela and PDVSA were around 30pts,
which would put them in line with sovereign recovery rates which involved
large principal haircuts. Sovereign bond restructurings since 1997 have usually
seen maturity extensions and coupon reductions, with principal haircuts not the
norm. There have been 27 sovereign default events since 1997, according to
Moody’s research12, which saw 36 sovereign bond restructurings. All but two
involved a maturity extension, with around 80% involving a reduction in coupon.
Only 45% saw a haircut on the principal, meaning this was not the norm. Given a
principal haircut is the quickest way to get debt/GDP levels lower, it is instructive
that these have not been the most common experience historically. This is likely to
do with the preference of countries not to have a disorderly or acrimonious default
involving large haircuts as they look at future market access. In fact, Moody’s found
that in 38% of cases the Debt/GDP ratio was higher after the restructuring13.
We think the single biggest question for recovery rate values has been whether
there have been principal haircuts. Moody’s estimates the average recovery rate
from 1983-2013 to be 49%14, although as Error! Reference source not
found.Figure 26 shows, this average does not appear to describe well the data
distribution which has largely fallen into two buckets: a) 20-40% recovery rate, and
b) >60% recovery rate. When we look more closely at the default events sorted in
ascending order by recovery rates in Table 14, it seems that the biggest factor
contributing to lower recovery rates is whether there were principal haircuts or not.
In fact, every example of recovery rates below 45 saw a principal haircut, and only
one case of recovery rates above 60 saw a principal haircut, only of 5 cents. This may
seem obvious, but actually coupons and maturity extensions can have large NPV
impacts as well. So the lows in Venezuela and PDVSA bond prices have implied a
high chance of default with a large haircut.
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