Standard & Poors, the credit ratings agency, has launched a new recovery rating system for secured bank loans in Europe.
The new rating scale will indicate the range of expected loss or recovery that an investor can expect in the event of default by an issuer to provide a clear distinction between default risk and loss given default.
Alongside the traditional default-orientated corporate credit rating (CCR), the new system will assess the likely recovery of principal if there is a default on the loan.
S&P’s existing bank loan rating (BLR) is also concerned with the likelihood of recovery in the event of default, but it is linked to the risk of default embedded in the CCR, as well as taking into account additional protective features of loans such as collateral and restrictive covenants that CCRs do not. The recovery rating considers purely post-default recovering prospects, expressed as an absolute rating totally independent of the CCR.
And unlike CCRs, which focus on the likelihood of default in timely payment on a debt obligation, the recovery ratings estimate the likely recovery of principal in the event of default.
It does this by placing issues in five categories, as set out in the table below:
The rating is based on the recovery level at the time of default and so tries to predict what competitive pressures, economic conditions etc., may bring about such a situation.
Initially the new rating system will be applied purely to secured loans, but the aim is to extend it to mezzanine, second lien loans and secured bonds
S&P has no plans to phase out the BLR at the moment, saying that despite the recovery rating offering a much greater granularity, it recognises that many loan investors may still require the BLR.
S&P launched a recovery ratings service in the US in December 2003. Since that time it has assigned a recovery rating to 192 secured loans in the US, representing $95.3bn (€79.8bn) of debt.