Distressed recovery rates will drop by over 10% this year, predictsEdward Altman, the Max L. Heine professor of finance at the Stern School of Business at New York University. The renowned academic and default rate guru forecasts default rates will rise to around 3% this year, which would result in an average recovery rate of 43-45%. Last year, recovery rates were at 57%.
Altman explained the recovery rates are simply a matter of supply and demand: "If defaults start coming in, recoveries start going down." Altman estimates $150-$175 billion of actively managed money is currently chasing the limited opportunity in the distressed space. His comments came at the Eighth Annual East Distressed Debt Investing Forum last week in New York.
Roughly 7% of the market is currently distressed and historically one third of distressed debt defaults in 18 months, said Altman. He defines distressed debt as trading 1,000 basis points over Treasuries. This year's preliminary default rate sits at 0.32% but Altman is sticking to his 3% forecast by year-end. Through March, the Altman-NYU Solomon Center Defaulted Bond Index returned negative 1.67% after returning 19% last year.
