Bondholders usually do better than most other creditors in bankruptcy proceedings. The upcoming wave of bankruptcies is unlikely to be kind to such bondholders. They already face limited recoveries from companies that filed for bankruptcy.
According to Caroline Salas on Bloomberg.com on April 23, however, New York-based Fitch Ratings reports that, instead of receiving the historical average recovery of 42 cents on the dollar, in a default situation, bondholders of a third of high-yield, high-risk bonds rated B+ or lower may receive no more than 10 cents on the dollar. Another 22 percent are likely to only get 11 to 30 cents.
“When leverage was so ample, private equity firms were able to buy companies at multiples that didn’t make sense,” said James Keenan, who is co-head of leveraged finance at BlackRock Inc. “Most people use the assumption senior unsecured bonds are going to recover 40 percent. I don’t think you’re going to see that,” Keenan advised.