Recovery Trends: Any Usefulness Whatsoever?
by Martin S. Fridson of Merrill Lynch
August 24, 2000
Introduction: We believe the attention paid by investors to long-run average recovery rates on defaulted bonds is defensible on the grounds that they have a reasonably important bearing on an investment decision. It is harder to make such a case for investors' scrutiny of the annual, quarterly, and monthly fluctuations in recovery rates. As we shall show, the short-run variability of recovery rates, particularly within priority classes (senior secured, senior unsecured, subordinated) contains a great deal of statistical noise. Standard economic indicators explain the fluctuations up to a point, but it appears doubtful that investors can forecast the fluctuations accurately enough to profit by their efforts.