Distressed Returns Creep Lower
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Distressed Returns Creep Lower

The spread between distressed trading levels and ultimate recovery rates has been narrowing and is likely to remain historically small as defaults remain low and more investors push into distressed trading in a bid for yield, according to Kevin Kelhoffer, director in the risk solutions group at Standard & Poor's.

The spread between distressed trading levels and ultimate recovery rates has been narrowing and is likely to remain historically small as defaults remain low and more investors push into distressed trading in a bid for yield, according to Kevin Kelhoffer, director in the risk solutions group at Standard & Poor's.

The rating agency calculates what are essentially rates of return for distressed investors by measuring the average spread between trading levels 30 days after a default and ultimate recovery rates, which typically take place 18-24 months later. The spread between trading levels and recovery rates for credits that defaulted from 2001-2003 is from 15-17%--with the average spread for credits that defaulted at the beginning of the 1990s above 30%.

Kelhoffer anticipates recovery rates, which are above 50% for bankruptcy emergences through the second quarter of last year, will continue their upward trend due to a low default rate and new investors in the distressed arena.

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