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Global Credit Research - 29 Feb 2012
New York, February 29, 2012 -- Second-lien debt provides only slightly better average recovery
in default than similarly positioned senior unsecured debt, suggesting
that second-lien holders may gain a false sense of security from
their claim on a borrower's collateral, says a new special
comment by Moody's Investors Service.
"Second-lien debt can offer investors the best of both worlds:
a security interest in the borrower's assets and a better interest
rate than more-senior debt," said David Keisman,
a Moody's Senior Vice President and author of the report.
"But it is unlikely that second-lien holders expect such
a slight advantage over unsecured debt."
Within the same issuer family, the second-lien collateral
claim is still important, Moody's notes. Second liens
had a much better average recovery (66%) than unsecured debt (30%)
within the same corporate family.
Moody's review of 151 second-lien debt issuers that have
defaulted since 1988 shows that across issuer families, the second-lien
recovered an average of only 3.6 percentage points more than similarly
positioned senior unsecured debt instruments. The data come from
Moody's Ultimate Recovery Database, which includes recovery
data for about 1,000 corporate defaults dating back to 1988.
Moody's says this finding throws into question the incremental recovery
value of second-lien collateral interests, which in theory
should provide a recovery benefit in a default. But that's
not always the case when a borrower's assets may be sold below their
true value to satisfy first-lien lenders, leaving less for
second-lien holders, says Moody's.
"Lenders may consider their claims on collateral—getting paid
from liquidation of hard assets—a better deal than squabbling over
residual value after secured lenders have taken their share. But
if collateral values erode, then lenders may gain little recovery
benefit from their efforts to perfect their claims and craft intercreditor
agreements," said Keisman.
Moody's says that capital structure and firm-wide recoveries
are critical factors in second-lien recoveries. The presence
of an unsecured subordinated debt cushion significantly boosts second-lien
recoveries, as does ample collateral coverage that is sufficient
to repay both first- and second-lien lenders.
For more information, please see the full report "False Sense
of Security: Second-liens offer only slightly better recovery
in default than similarly positioned senior unsecured debt" on www.moodys.com.
***
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David Keisman
Senior Vice President
Data Products & Consortia
250 Greenwich Street
New York, NY 10007
U.S.A.
Tom Marshella
MD-US and Amer Corporate Fin
Corporate Finance Group
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Releasing Office:
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Moody's: Second-Lien Debt Offers Investors a False Sense of Security
No Related Data.
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