Glossary
Credit and risk
What is default and recovery?
The borrower stops paying; you collect what the collateral is worth.
Recovery, not default probability, is what separates a dull loss from a fatal one. Seniority, collateral quality and how early you acted dominate the outcome.
A worked example
A $100m loan defaults and the lender gets $65m back through the restructuring: a 65% recovery and a $35m loss. With a 2% annual default rate and 60% recoveries, expected loss is about 0.8% a year, and your spread has to cover it.
Where it catches you in the game
- Defaults write down invested capital by the recovery shortfall and dent reputation.
It comes up most on the private credit desk and the restructuring desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what default and recovery does to your returns.