Understanding and Predicting Ultimate Loss-Given-Default for

Defaulted Bonds and Loans

Michael Jacobs, Jr.1

Office of the Comptroller of the Currency

Ahmet K. Karagozoglu
Hofstra University

Draft: June 2006

J.E.L. Classification Codes: G33, G34, C25, C15, C52.

Keywords: Recoveries, Default, Loss Given Default, Financial Distress,
Bankruptcy, Restructuring, Credit Risk, Entropic Methods, Bootstrap Methods,
Forecasting

Corresponding author: Senior Financial Economist, Credit Risk Modelling, Risk Analysis Division, Office
of the Comptroller of the Currency, 250 E Street SW, 2nd Floor, Washington, DC 20024, 202-874-4728,
michael.jacobs@occ.treas.gov. The views herein are those of the authors and do not necessarily represent
the views of the Office of the Comptroller of the Currency.

Abstract
In this study we empirically investigate the determinants of and build a predictive
econometric model for loss-given-default (LGD) using a sample of S&P and Moodys
rated defaulted firms. We extend prior work by incorporating contractual, firm
specific, industry, macroeconomic debt/ equity market determinants of LGD (Acharya
et al, 2003) in a Kullback-Leibler relative entropy framework (Friedman et al, 2003).
We are also able to model to duration of time in default in an internally consistent
manner, generating a predicted bivariate distribution of time to resolution and
ultimate LGD. We confirm many of the stylized facts and findings of the literature in
regard to the determinants of LGD and find in addition the independent significance
of a macroeconomic factor, equity returns and the price of traded debt at default in
explaining the LGD. The model is validated rigorously through resampling
experiment in a rolling out-of-time and out-of-sample framework.

1.

Introduction and Summary

Loss given default (LGD) 2, the loss severity on defaulted obligations, is a

critical component of risk management, pricing and portfolio models of credit.
This is among the three primary determinants of credit risk, the other two
being the probability of default (PD) and exposure of default (EAD). However,
LGD has not been extensively studied as, and is considered a much more
daunting modeling challenge in comparison to, PD. Starting with the seminal
work by Altman (1968), and after many years of actuarial tabulation by rating
agencies, predictive modeling of default rates is currently in a mature stage.
The focus on PD is understandable, as traditionally credit models have
focused on systematic components of credit risk which attract risk premia,
and unlike PD, determinants of LGD have been ascribed to idiosyncratic
borrower specific factors. However, now there is an ongoing debate about
whether the risk premium on defaulted debt should reflect systematic risk, in
particular whether the intuition that LGDs should rise in worse states of the
world is correct and how this could be refuted empirically given limited and
noisy data (Carey and Gordy, 2004).
The recent heightened focus on LGD is evidenced the recent flurry of
research into the relatively neglected area of LGD (Acharya et al (2005),
Carey and Gordy [2004, 2005], Altman et al [1996, 2001, 2004], Gupton et al
[2000, 2001], Araten et al [2003], Frye [2000 a,b,c], Jarrow [2001]). This has
been motivated by the large number of defaults and near simultaneous
decline in recovery values observed at the trough of the last credit cycle circa
2000-2002, regulatory developments (Basel) and the growth in credit
markets. However, obstacles to better understanding and predicting LGD,
including dearth of data and the lack of a coherent theoretical underpinning,
have continued to challenge researchers. In this paper, we hope to
contribute to this effort by synthesizing advances in financial theory,
econometric methodology and data acquisition in order to build an empirical
model of LGD that is consistent with a priori expectations and stylized facts,
internally consistent and amenable to rigorous validation. In addition to
answering the many questions that academics have, we further aim to
provide a practical tool for risk managers, traders and regulators in the field
of credit.
LGD may be defined variously depending upon the institutional setting or
modeling context, or the type of instrument (traded bonds vs. bank loans)
versus the credit risk model (pricing debt instruments subject to the risk of
default vs. expected losses or credit risk capital. In the case of bonds, one
may look at the price of traded debt at either the initial credit event 3 or the
value of instruments received in settlement of a bankruptcy proceeding
This is equivalent to one minus the recovery rate, or dollar recovery as a proportion
of par. We will speak in terms of LGD as opposed to recoveries with a view toward
credit risk management applications.
3
By default we mean either bankruptcy (Chapter 11) or other financial distress
(payment default). In a banking context, this defined as synonymous with respect to
non-accrual on a discretionary or non-discretionary basis. This is akin to the
regulatory definition of default (Basel).
2

(Keisman et al, 2000; Altman et al, 1996). When looking at loans that may
not be traded, the eventual loss per dollar of outstanding balance at default
is relevant (Asarnow et al, 1995; Araten et al, 2003). There are two ways to
measure the latter the accounting LGD refers to nominal loss per dollar
outstanding at default4, while the economic LGD refers to the discounted cash
flows to the time of default taking into consideration when cash was
received.5 The former is used in setting reserves or a loan loss allowance,
while the latter is an input into a credit capital allocation model.
An aspect of LGD modeling deserving of special attention, until recently
neglected altogether or grossly simplified, is the distributional
characterization of this quantity. While the available theory and evidence
suggests it to be stochastic and predictable with respect to other variables,
LGD has been treated as either deterministic or as an exogenous stochastic
process. Such assumptions are made for tractability and in practical
application results in understated capital, mispricing and unrealistic dynamics
of model outputs. We will contribute to resolving such deficiencies by
attempting to model the ex ante distribution of LGD as a function of empirical
determinants contractual features, borrower characteristics and systematic
factors. However, we will not directly model the interdependency between
LGD and other parameters of interest, such as probabilities of default, by
either estimating a structural or reduced form model in which they are
determined simultaneously6.

In the context of bank loans, this is the cumulative net charge-off as a percent of
book balance at default (the net charge-off rate).
5
There is debate surrounding the appropriate choice for a discount rate. Bank
studies (Araten et al, 2003) have put forward arguments for a punitive rate as
consistent with the low end of what buyers of distressed assets look for as overall
return, the uncertainty of recoveries (with the standard deviation about equal to the
average), the rates used by commercial loan pricing models, and consistency with
peer practice. A competing argument among academics (Acharya et al, 2004) as
well as practitioners (Friedman et al 2003) and that it is proper to discount ultimate
recoveries using the coupon on the debt prior to default. Finally, some have argued
in favor of discounting recoveries at the default risk-free Treasury term structure
(Carey and Gordy, 2005). We do not address this issue directly in this paper
however, to the extent that one can jointly forecast time-to-resolution and the
ultimate recovery, an implicit estimate of the proper actuarial discount rate can be
formulated based upon this research.
6
Altman et al (2003) offers an extensive review of the theory and empirical evidence
regarding the relationship between LGD and PD, and further documents the influence
of the economic state on recovery values and hence the LGD estimate.
4

2.

Review of the Literature

In this section we will examine the way in which different types of theoretical
credit risk models have treated LGD assumptions, implications for
estimation and application. We will then turn to the empirical evidence, both
on the estimation of LGD, and on the performance of these various models.
Finally, we will look at some of the stat-of-the-art and vendor models of LGD,
and how they have attempted to incorporate lessons learned.
2.1

Treatment of LGD in Theoretical Credit Risk Models

Credit risk modeling was revolutionized by the approach of Merton (1974),

who built a predictive theoretical model in the option pricing paradigm of
Black and Scholes (1973), which has come known to be the structural
approach. Equity is modeled as a call option on the value of the firm, with
the face value of zero coupon debt serving as the strike price, which is
equivalent to shareholders buying a put option on the firm from creditors with
this strike price. Given this capital structure, log-normal dynamics of the firm
value and the absence of arbitrage, closed form solutions for the default
probability and the spread on debt subject to default risk can be derived. The
LGD can be shown to depend upon the parameters of the firm value process
as is the PD, and moreover is inversely related to the latter, in that the
expected residual value to claimants is increasing (decreasing) in firm value
(asset volatility or the level of indebtedness). Therefore, LGD is not
independently modeled in this framework; this was addressed in much more
recent versions of the structural framework (Frye [2000], Dev et al [2002[,
Pykhtin [2003]), to be discussed in more detail later.
Many extensions of Merton (1974) that relaxed many of the simplifying
assumptions. Complexity to the capital structure was added by Black and
Cox (1976) and Geske (1977), with subordinated and interest paying debt,
respectively. The distinction between long- and short-term liabilities in
Vasicek (1984) was the precursor to the KMV model. However, these
models had limited practical applicability, the standard example being
evidence of Jones, Mason and Rosenfeld (1984) that these models were
unable to price investment grade debt any better than a nave model with no
default risk. Further, empirical evidence in Franks and Touros showed that
the adherence to absolute priority rules (APR) assumed by these models are
often violated in practice, which implies that the mechanical negative
relationship between expected asset value and LGD may not hold. Longstaff
& Schwartz (1995) incorporate into this framework a stochastic term
structure with a PD-interest rate correlation. Other extensions include Kim at
al (1993) and Hull & White (1995), who examine the effect of coupons and
the influence of options markets, respectively.
Partly in response to this, a series of extensions ensued, the so-called
second generation of structural form credit risk models (Altman [2003]).
The distinguishing characteristic of this class of models is the relaxation of
the assumption that default can only occur at the maturity of debt now
default occurs at any point between debt issuance and maturity when the

firm value process hits a threshold level. The implication is that LGD is
exogenous relative to the asset value process, defined by a fixed (or
exogenous stochastic) fraction of outstanding debt value. This approach can
be traced to the barrier option framework as applied to risky debt of Black
and Cox (1976).
All structural models suffer from several deficiencies which. First, reliance
upon an unobservable asset value process makes calibration to market prices
problematic and invites model risk. Second, the limitation of assuming a
continuous diffusion for the state process implies that the time of default is
perfectly predictable (Duffie and Lando [2000]). Finally, the inability to model
spread or downgrade risk distorts the measurement of credit risk. This gave
rise to the reduced form approach to credit risk modeling (Duffie and
Singleton, 1999), which instead of conditioning on the dynamics of the firm,
posit exogenous stochastic processes for PD and LGD. These models include
Litterman & Iben (1991), Madan & Unal (1995), Jarrow & Turnbull (1995),
Jarrow et al (1997), Lando (1998), Duffie (1998). The primitives determining
the price of credit risk are the term structure of interest rates (or short rate),
a default intensity and an LGD process. The latter may be correlated with PD,
but this is exogenously specified, with the link of either of these to the asset
value (or latent state process) not formally specified. However, the available
empirical evidence (Duffie and Singleton [1999], Lando and Turnbull [1997])
has revealed these models deficient in generating realistic term structures of
credit spreads for investment and speculative grade bonds simultaneously. A
hybrid reduced structural form approach of Zhou (2001), which models firm
value as a jump diffusion process, has had more empirical success, especially
in generating a realistic negative relationship between LGD and PD (Altman
et al 2001, 2003).
The fundamental difference of reduced with structural form models is the
unpredictability of defaults: PD is non-zero over any finite time interval, and
the default intensity is typically a jump process (e.g., Poisson), so that default
cannot be foretold given information available the instant prior. However,
these models can differ in how LGD is treated. The recovery of treasury
assumption of Jarrow & Turnbull (1995) assumes that an exogenous fraction
of an otherwise equivalent default-free is recovered at default. Duffie and
Singleton (1999) introduce the recovery of market value assumption, which
replaces the default-free bond by a defaultable bond of identical
characteristics to the bond that defaulted, so that LGD is a stochastically
varying fraction of market value of such bond the instant before default. This
model yields closed form expressions for defaultable bond prices and can
accommodate the correlation between PD and LGD; in particular, these
stochastic parameters can be made to depend on common systematic or firm
specific factors. Finally, the recovery of face value assumption (Duffie [1998],
Jarrow et al [1997]) assumes that LGD is a fixed (or seniority specific) fraction
of par, which allows the use of rating agency estimates of LGD and transition
matrices to price risky bonds.
It is worth mentioning the treatment of LGD in credit models that attempt to
quantify unexpected losses analogously to the Value-at-Risk (VaR) market risk

models, so-called credit VaR models (Creditmetrics [Gupton et al, 1997],

KMV CreditPortfolioManager [KMV Corporation, 1984], CreditRisk + [Credit
Suisse Financial Products, 1997], CreditPortfolioView [Wilson, 1998]). These
models are widely employed by financial institutions to determined expected
credit losses as well as economic capital (or unexpected losses) on credit
portfolios. The main output of these models is a probability distribution
function for future credit losses over some given horizon, typically generated
by simulation of analytical approximations, as it is modeled as a highly nonnormal (asymmetrical and fat-tailed). Characteristics of the credit portfolio
serving as inputs are LGDs, PDs, EADs, default correlations and rating
transition probabilities. Such models can incorporate credit migrations
(mark-to-market mode - MTM), or consider the binary default vs. survival
scenario (default mode - DM), that principle difference being that in addition
an estimated transition matrix needs to be supplied in the former case.
Similarly to the reduced form models of single name default, LGD is
exogenous, but potentially stochastic. While the marketed vendor models
may treat LGD as stochastic (e.g., a draw from a beta distribution that is
parameterized by expected moments of LGD), there are some more elaborate
proprietary models that can allow LGD to be correlated with PD.
We conclude our discussion of theoretical credit risk models and the
treatment of LGD by considering recent approaches, which are capable of
capturing more realistic dynamics, sometimes called hybrid models. These
Frye (2000a, 2000b), Jarrow (2001), Jokivuolle et al (2003), Carey & Gordy
(2003), Pykhtin (2003) and Bakshi et al (2001). These models share in
common the feature that dependence upon one or a set of systematic factors
can induce an endogenous correlation between PD & LGD. In the model of
Frye (2000a, 2000b), the mechanism that induces this dependence is the
influence of systematic factors upon the value of loan collateral, leading to a
lower recoveries (and higher loss severity) in periods where default rates rise
(since asset values of obligors also depend upon the same factors). In a
reduced form setting, Jarrow (2001) introduced a model of co-dependent LGD
and PD implicit in debt and equity prices. 7
2.2

Empirical Evidence on LGD and Tests of Credit Models

In this section we focus on the application of credit models and estimation of

LGD from data. This ranges from simple quantification of LGD, calibration of
credit models embedding LGD assumptions, and finally to empirical or vendor
models of LGD.
There is a long tradition of actuarially estimating loss severities from bond or
loan data, independent of any credit modeling framework and allied
parameters such as PD. These have been conducted by academics, banks
and rating agencies. The earliest studies relied exclusively on secondary
market prices of bonds or loans. Altman & Kishore (1996) estimate LGDs for
300 defaulted senior secured and senior unsecured bonds from 1978-1995,
yielding estimates ranging from 10% to 70% that could be statistically
7

Jarrow (2001) also has the advantage of isolating the liquidity premium embedded in defaultable bond
spreads.

distinguished among various industry groups. In the ZETA model of

Altman, Haldeman and Narayanan (1977), a 2nd generation of the Altman
(1967) Z-Score PD estimation model, loan LGD estimates were based on a
workout department survey. Later studies looked at ultimate recoveries on
defaulted loans or bonds, either the nominal or discounted price at
emergence from bankruptcy. Altman and Eberhart (1994) and Fridson et al
(Merrill Lynch 2001) provided evidence that more senior significantly
outperformed more junior bonds in the post-default period. Altman and
Kishore (1996) find statistically different LGDs across broad industrial sectors.
LGD in bank loans have been studied by banks, rating agencies and
academics. Bank studies focusing on internal loan data include Citigroup
(Asarnow & Edwards, 1995), Chase Manhattan Bank (1996) and JP Morgan
Chase (Araten et al, 2003)8. Average LGDs of 35% (861 large corporate
obligors 1979-1993), 36% (412 large corporate obligors 1986-1993) and 40%
(3800 wholesale loans 1982-2000) for were found in the Citigroup, Chase and
JPMC studies, respectively. Finally, among those conducting historical
analysis, some recent rating agency studies are worthy of note. Moodys
(Hamilton et al, 2001) reports an implied mean LGD of 30.3% (47.9%) for
121(181) senior secured (senior unsecured) secondary market loan prices a
month after default. Various consortia of banks have published composite
loss severity statistics from member banks, including Loan Pricing
Corporation (2001; LPC) and the Risk Management Association (2000; RMA) 9;
however, the degree of segmentation by borrower and instrument
characteristics is limited in these, and there are issues associated with
normalizing data across banks. Standard and Poors (Keisman et al, 2000)
presents empirical results from the LossStats TM database. Analysis of 264
(690) bank loans (senior unsecured bonds) from 1987-1996 yields an average
LGD of 16% (34%). This study also documents the independent influence of
position in the capital structure (i.e., the proportion of debt above or below a
claimant in bankruptcy), apart from collateral and seniority, in determining
loss severities. Emery (2003) and Altman and Fanjul (2004) compare LGDs,
as inferred from the prices of the traded instruments at default in a Moodys
database, on bank loans and bonds, respectively. A comparison of results
reveals that loans experienced lower loss severity when controlling for
seniority.10 Varma et al (2003) document similar findings for corporate bonds
as Altman and Fanjul (2004). Additionally, Altman and Fanjul (2004)
document a differential LGD by rating at origination, such that fallen angels
of the same seniority have significantly lower LGDs. 11
Several recent empirical studies of LGD by academics have put more
structure around this exercise, either by building predictive econometric
models, or by attempting to directly test models. Frye (2000b) examines the
8

Average LGDs of 35% (861 large corporate obligors 1979-1993), 36% (412 large corporate obligors
1986-1993) and 40% (3800 wholesale loans 1982-2000) for were found in the Citigroup, Chase and JPMC
studies, respectively.
9
LPC (RMA) find an average accounting LGD of 30% (27%) for 2,534 (977) loans, both in the 19982001period.
10
In a comparable period, both authors find median LGDs on senior secured loans, senior secured bonds,
unsecured loans and senior unsecured bonds were found to be 27.0%, 45.5%, 49.5% and 57.7%.
11
Median LGDs of 49.5% and 66.5% for defaulted issuers originally investment and speculative grade,
respectively.

LGD-PD correlation in 1982-1997 using the Moodys Default Risk Service

[DRSTM], finding a significant negative relationship at various levels of
aggregation, consistent with the recent market experience in the 2001-2002
turn in the credit cycle. Hu and Perraudin (2002) also examines this
relationship with Moodys DRSTM for the 1983-2000 period, standardizing the
data by transforming all borrowers to senior unsecured, thereby isolating the
influence of systematic factors. They find LGD-PD correlations on the order of
0.2. Carey and Gordy (2004) analyze the correlation of LGD and PD in a
combined database of defaults in 1970-199912. Examining aggregated
quarterly data at the obligor level, while they find almost negligible
correlation with PD over the entire sample, in 1988-1998 there is a significant
relationship that is in line with Fryes (2000b) results 13. However, they
document that LGDs tend to rise more in recessionary periods than they fall
during expansions, suggesting that more is at play than a macroeconomic
factor influencing the value of collateral. 14 In the Araten et al (2001) bank
study, unsecured U.S. large corporate borrower level LGDs are regressed
average Moodys All-Corporate default rate for the period 1984-1999 on an
annual basis, yielding an r-squared of 0.2, in line with Carey and Gordy (2004)
for their restricted sample, yet significantly higher than Hu and Peraudin
(2002). Altman et al (2001,2004) find an that LGDs increase as the credit
cycle worsens, going from 75% in 2001-2003 to 55% in 2003 as default rates
decreased beneath their long run average of 4.5%. This is verified by
Keisman (2003), who finds that LGDs of all seniorities rise during this stress
period, in the S&P LossStats TM database. However Altman (2004) finds that a
systematic variable has no effect on LGD when bond market conditions (e.g.,
supply-demand imbalances) are accounted for. However, Acharya et al
(2005) examine the same data as Keisman (2003) for the period 1982-1999,
and while they verify that seniority and security are key determinants of LGD,
in addition they find industry specific factors influencing LGD independently
of the macroeconomic state and bond market conditions seen in Altman
(2004). In particular, they find elevated LGDs in distressed industries (less
redeployable assets, greater leverage and lower liquidity), after controlling
for firm / contract systematic factors. This constitutes a test of the Schleifer
and Vishny (1992) fire-sale hypothesis an industry equilibrium
phenomenon in which macro and bond market variables are spuriously
significant due to omitting an industry factor.
Finally, we may mention vendor models of LGD, which incorporate
approaches taken in the academic and agency literature, in addition applying
proprietary methodologies and data sources. S&P (Friedman & Sandow,
2003) applies a Kulback-Leibler maximum entropy non-linear regression
12

Moodys DRSTM, S&Ps LossStatsTM and S&Ps CreditprioTM , and the Society of Actuaries private
placements database.
13
Correlations of 0.45 (0.80) for senior (subordinated) debt.
14
Carey ands Gordy (2004) argue for a 2 stage approach to measuring LGD, first estimating an estate
LGD at the obligor level, and then treating instrument level LGDs according to a contingent claims
approach, as under the Absolute Priority Rule (APR) such recoveries can be viewed as collar options on
residual value of the firm. However, they argue that the endogeneity of the bankruptcy decision will result
in a measurement problem in the 1st stage borrower level. Furthermore, an extensive literature on
violations of APR suggests a similar problem in the 2nd stage instrument level (Hotchkiss [1993], Eberhart
et al [1989], Weiss [1990]).

model to the LossStatsTM database, which incorporates Bayesian style prior

information (point masses at 0 and 100%) to produce predictive densities of
LGD. Moodys LoosCalc2 (Gupton, 2004) applies an econometric based
models (local regression) to KMVs proprietary LGD database.

10

Econometric Models

11

Data and Summary Statistics

We have built a database of defaulted firms (bankruptcies and out-of-court
settlements), all having rated instruments (S&P or Moodys) at some point
prior to default. It contains data on 2,732 defaulted instruments from 19862003 for 650 borrowers, or which there is information on all classes of debt.
All instruments are detailed by type, seniority, collateral type, position in the
capital structure, original and defaulted amount, resolution type, instrument
price at emergence from as well as the value of securities received in
settlement from bankruptcy.

12

Estimation Results

13

Summary and Conclusions

14

Appendix Tables and Figures

Table 1 - Characteristics of LGD Observations by Default Type and Availability of Financial Statement Data (S&P and Moody's Rated Defaults 1985-2003)

Chapter 11
Out-of-Court
Out-of-Court
Total

1.2 - Obligor Level Observations

Chapter 11

Total

1.1 - Instrument Level Observations

Compustat
Numer of
LGD at Discounted Creditor Principle at
1
2
3
4
Default
LGD
Classes Default
Count
846
1866
Average
63.20% 51.09%
2.4309
151,750
Median
70.00% 57.20%
2.0000
83,410
Standard Deviation
28.65% 39.61%
0.8828
250,787
Minimum
-12.00% -107.20%
1.0000
0
5th Percentile
8.14%
-4.88%
1.0000
4,500
95th Percentile
97.59% 100.00%
4.0000
500,000
Maximum
99.80% 100.00%
6.0000
4,600,000
Count
104
410
Average
45.73% 18.72%
2.4659
146,524
Median
45.00% 0.03%
2.0000
63,529
Standard Deviation
26.74% 32.21%
.
256,479
Minimum
-1.00% -70.89%
1.0000
0
5th Percentile
3.62%
-4.54%
1.0000
1,623
95th Percentile
89.15% 85.85%
4.0000
523,235
Maximum
98.00% 100.00%
5.0000
2,250,000
Count
950
2276
Average
61.29% 45.26%
2.4372
150,808
Median
68.52% 47.74%
2.0000
80,124
Standard Deviation
28.96% 40.34%
0.8870
251,773
Minimum
-12.00% -107.20%
1.0000
0
5th Percentile
7.59%
-4.83%
1.0000
3,625
95th Percentile
97.26% 100.00%
4.0000
506,125
Maximum
99.80% 100.00%
6.0000
4,600,000
Count
315
422
Average
65.44% 53.62%
2.2251
670,990
Median
69.00% 56.73%
2.0000
291,175
Standard Deviation
23.85% 29.40%
0.8631
1,806,477
Minimum
-5.52% -37.87%
1.0000
11,531
5th Percentile
16.86% 0.81%
1.0000
48,334
95th Percentile
93.07% 96.12%
4.0000
1,966,962
Maximum
99.00% 100.00%
6.0000
########
Count
55
98
Average
54.39% 27.11%
2.2551
613,007
Median
68.46% 21.65%
2.0000
225,946
Standard Deviation
25.25% 28.78%
0.8653
2,013,300
Minimum
5.29%
-64.89%
1.0000
14,495
5th Percentile
20.77% -9.86%
1.0000
43,696
95th Percentile
93.85% 72.53%
4.0000
1,502,341
Maximum
92.77% 94.01%
5.0000
########
Count
370
520
Average
63.80% 48.62%
2.2308
660,063
Median
68.79% 51.19%
2.0000
278,875
Standard Deviation
24.35% 31.04%
0.8627
1,845,329
Minimum
-5.52% -64.89%
1.0000
11,531
5th Percentile
16.63% -1.06%
1.0000
45,283
95th Percentile
93.48% 93.24%
4.0000
1,946,021
Maximum
99.00% 100.00%
6.0000
########
1 - One miunus the price of defaulted debt at the time of defulat

Time-to5
Resolution
1.5347
1.3111
1.0836
0.0556
0.2250
3.6076
6.8667
0.2417
0.0028
0.6130
0.0028
0.0028
1.3111
5.6444
1.3018
1.0986
1.1301
0.0028
0.0028
3.4222
6.8667
1.5312
1.3639
1.0040
0.0556
0.2754
3.3893
6.8667
0.4523
0.0792
0.8285
0.0028
0.0028
1.8528
5.6444
1.3279
1.1667
1.0604
0.0028
0.0028
3.2718
6.8667

LGD at
Default
150
61.12%
68.69%
27.07%
2.52%
12.42%
95.99%
99.75%
18
47.04%
54.75%
29.00%
-7.87%
-1.18%
84.17%
97.47%
168
59.61%
65.44%
27.54%
-7.87%
10.61%
96.10%
99.75%
77
63.68%
65.66%
21.76%
9.29%
14.50%
94.61%
98.29%
13
52.64%
62.00%
22.49%
21.00%
20.74%
89.80%
97.47%
90
62.09%
65.31%
-22.09%
-9.29%
14.50%
93.65%
-98.29%

Non-Compustat
Numer of
Discounted Creditor Principle Time-toLGD
Classes at Default Resolution
372
45.59%
2.4597
113,001 1.2248
51.97%
2.0000
70,000
1.1514
42.70%
1.0721
146,925 0.7943
-124.19%
1.0000
0
0.0472
-10.58%
1.0000
2,023
0.1614
100.00%
5.0000
364,102 2.5896
100.00%
5.0000
1,225,000 4.9917
84
9.93%
2.4405
104,319 0.3140
0.03%
2.0000
50,000
0.0028
30.05%
0.7968
177,189 0.5673
-99.35%
1.0000
801
0.0028
-24.03%
1.0000
3,130
0.0028
54.62%
4.0000
342,500 1.9472
99.00%
4.0000
1,350,000 1.9472
456
39.02%
2.4561
111,401 1.0570
39.25%
2.0000
63,966
0.9611
42.93%
1.0262
152,775 0.8355
-124.19%
1.0000
0
0.0028
-15.80%
1.0000
2,102
0.0028
100.00%
5.0000
360,139 2.3833
100.00%
5.0000
1,350,000 4.9917
110
53.40%
2.1273
382,212 1.3560
53.51%
2.0000
209,000 1.1736
28.46%
1.0414
696,960 0.8841
-12.07%
1.0000
17,611
0.0889
3.44%
1.0000
49,431
0.1825
95.69%
4.0000
1,131,799 2.8575
99.88%
5.0000
6,415,738 4.9917
20
12.27%
2.4000
438,140 0.4378
14.35%
2.0000
260,296 0.2097
27.53%
0.8208
537,950 0.5690
-47.02%
1.0000
75,840
0.0028
-34.57%
1.0000
106,487 0.0028
50.54%
4.0000
1,337,473 1.4854
50.99%
4.0000
2,375,000 1.9472
130
47.08%
-2.1692 -390,817 -1.2147
48.07%
2.0000
223,110 1.0681
-31.91%
-1.0126 -673,406 -0.9048
47.02%
-1.0000 -17,611
-0.0028
-4.78%
1.0000
49,950
0.0750
95.44%
4.0000
1,195,574 2.8211
-99.88%
-5.0000 -6,415,738 -4.9917

Total
Numer of
LGD at Discounted Creditor Principle
Default LGD
Classes at Default
996
2238
62.89% 50.18%
2.4357
145,309
69.62% 56.80%
2.0000
80,386
28.42% 40.18%
0.9168
237,115
-12.00% -124.19%
1.0000
0
9.28% -5.23%
1.0000
4,024
97.51% 100.00%
4.0000
500,000
99.80% 100.00%
6.0000
4,600,000
122
494
45.92% 17.22%
2.4615
139,347
65.44% 39.25%
2.0000
63,966
26.96% 31.99%
0.8880
245,175
-7.87% -99.35%
1.0000
0
10.61% -15.80%
1.0000
2,102
96.10% 100.00%
5.0000
360,139
98.00% 100.00%
5.0000
2,250,000
1118
2732
61.04% 44.22%
2.4403
144,231
68.41% 46.09%
2.0000
76,433
28.74% 40.84%
0.9116
238,558
-12.00% -124.19%
1.0000
0
8.11% -5.96%
1.0000
3,336
97.10% 100.00%
4.0000
500,000
99.80% 100.00%
6.0000
4,600,000
392
532
65.10% 53.57%
2.2049
611,280
68.69% 55.74%
2.0000
262,778
23.44% 29.18%
0.9027
1,643,396
-5.52% -37.87%
1.0000
11,531
15.79% 0.85%
1.0000
48,768
93.48% 95.91%
4.0000
1,921,658
99.00% 100.00%
6.0000
########
68
118
54.06% 24.60%
2.2797
583,369
66.45% 21.38%
2.0000
246,655
24.60% 29.00%
0.8562
1,847,114
5.29% -64.89%
1.0000
14,495
16.72% -14.31%
1.0000
48,421
93.29% 71.96%
4.0000
1,502,341
97.47% 94.01%
5.0000
########
460
650
63.46% 48.31%
2.2185
606,213
68.22% 50.44%
2.0000
261,291
23.91% 31.20%
0.8942
1,680,742
-5.52% -64.89%
1.0000
11,531
15.41% -1.18%
1.0000
48,585
93.53% 94.65%
4.0000
1,906,259
99.00% 100.00%
6.0000
########

2 - The ultimate dolloar loss-given-default on the defaulted debt instrument = 1 - (recovery at emergence from bankruptcy or time of final settlement as a percent of par). Alternative ly, this can be expresse
(outstanding at default - total ultimate dollar recovery) / (outstanding at default).
3 - Major creditor classesa as defined by the bankruptcy court or by mutual agreement in the out-of-court settlement.
4 - The total instrument outstanding at default.
5 - The time in years from the instrument default date to the time of ultimate recovery.

15

16

Table 2 - LGD, Dollar Loss, Duration and Court Filing of Defaulted Instruments and Obligors by Cohort Year
(S&P and Moody's Rated Defaults 1985-2003)

Year
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Total

Instruments
Total
Average
Defaulted Time-toNumber Average
Proportion Number
Discounted Amount
Resolution of Chapter of
of
1
2
3
Defaults LGD
($MM)
(Yrs.)
11 Filings Defaults
2
N/A
43
95
99
228
287
120
121
66
93
72
60
66
163
237
354
446
163
17
2,732

82.70%
N/A
51.86%
45.28%
59.88%
41.59%
35.61%
38.53%
34.33%
26.41%
36.28%
34.54%
40.63%
64.99%
44.10%
54.59%
55.22%
47.51%
26.90%
6.86%
44.22%

486
N/A
2,737
5,008
10,618
26,633
27,843
10,554
7,740
4,670
7,728
5,068
6,752
6,935
26,518
33,378
57,611
134,694
17,887
1,179
394,039

5.8653
N/A
1.1458
2.3487
1.9773
1.6169
1.4966
1.6360
0.9837
0.8774
1.2872
1.1723
1.6031
1.4139
1.3727
1.4834
1.1741
0.7761
0.3834
0.0237
1.2609

100.00%
N/A
39.53%
85.26%
74.75%
77.19%
72.13%
80.00%
82.64%
74.24%
95.70%
94.44%
100.00%
100.00%
93.87%
98.73%
92.09%
73.54%
66.26%
23.53%
81.92%

1
N/A
9
21
25
62
66
27
27
25
33
22
15
23
48
56
81
73
33
3
650

Obligors
Average
Discounted
1
LGD
82.59%
N/A
48.57%
56.22%
55.69%
41.72%
39.50%
45.67%
37.39%
41.02%
42.34%
43.32%
52.48%
60.09%
49.46%
58.84%
59.74%
49.56%
35.02%
16.30%
48.31%

Total
Defaulted
2
Amount
486
N/A
2,907
5,532
11,247
32,080
26,213
7,939
5,516
4,578
7,791
6,156
5,846
8,214
27,164
37,876
68,374
118,725
16,376
1,017
394,039

Average
Time-to3
Resolution
5.9278
N/A
1.6454
1.9657
1.3807
1.8004
1.5068
1.4727
1.2214
1.0739
1.3519
1.4910
1.4224
1.4135
1.3063
1.3956
1.1896
0.8119
0.4079
0.0028
1.3052

Proportion
of Chapter
11 Filings
100.00%
N/A
55.56%
76.19%
68.00%
77.42%
74.24%
85.19%
74.07%
80.00%
93.94%
95.45%
100.00%
100.00%
93.75%
96.43%
83.95%
75.34%
63.64%
0.00%
81.85%

1 - The ultimate dolloar loss-given-default on defaulted debt instrument or obligor = 1 - (recovery at emergence from bankruptcy or
time of final settlement as a percent of par). Alternative ly, this can be expressed as (outstanding at default - total ultimate dollar
recovery) / (outstanding at default).
2 - The total instrument or obligor outstanding at default.
3 - The time in years from the instrument or firm default date to the time of ultimate recovery.

17

Table 3 - Discounted LGD1 by Industry Group (S&P and Moody's Rated Defaults 1985-2003)
Instruments

Obligors

Number
Number
of
Standard
5th
95th
of
Standard
5th
95th
Defaults Average
Median
Deviation
Percentile Percentile
Defaults Average
Median
Deviation
Percentile Percentile
Industry Group
Aerospace / Auto / Capital Goods / Equipment
218
38.08%
33.79%
41.12%
-16.39%
100.00%
57
48.77%
54.37%
28.98%
-0.03%
89.74%
Consumer / Service Sector
635
43.96%
47.80%
42.16%
-10.75%
100.00%
161
45.51%
46.99%
30.89%
-1.06%
91.17%
Energy / Natural Resources
204
45.34%
45.38%
36.43%
-1.41%
98.34%
53
44.52%
46.97%
29.12%
1.49%
92.13%
Financial Institutions
124
40.48%
47.12%
39.39%
-5.12%
99.97%
28
54.45%
56.76%
36.52%
-7.16%
99.67%
Forest / Building Prodects / Homebuilders
151
37.38%
49.95%
36.44%
-5.95%
100.00%
29
44.96%
40.19%
26.12%
7.25%
86.14%
Healthcare / Chemicals
198
42.10%
36.32%
41.59%
-5.50%
99.20%
49
46.79%
50.44%
30.07%
3.78%
91.57%
High Technology / Telecommunications
528
55.31%
69.11%
40.36%
-1.35%
100.00%
104
60.77%
67.61%
30.74%
1.22%
98.26%
Insurance and Real Estate
84
52.09%
57.07%
37.40%
-9.13%
99.57%
22
52.76%
55.88%
31.16%
3.47%
90.72%
Leisure Time / Media
394
39.70%
39.60%
41.26%
-11.21%
99.42%
109
44.32%
43.96%
29.59%
-3.74%
89.15%
Transportation
113
49.20%
54.73%
43.91%
-14.58%
100.00%
25
47.68%
50.23%
34.43%
-6.09%
98.62%
Utilities
83
18.78%
17.13%
24.49%
-5.24%
49.73%
13
24.02%
27.48%
40.04%
-28.77%
90.30%
Grand Total
2,732
44.22%
46.09%
40.84%
-5.96%
100.00%
650
48.31%
50.44%
31.20%
-1.18%
94.65%
1 - The ultimate dolloar loss-given-default on defaulted debt instrument or obligor, discounted at the coupon rate on defaulted debt just prior to default = 1 - (discounted recovery at emergence from
bankruptcy or time of final settlement as a percent of par).

Table 4 - Discounted LGD1 by Instrument and Collateral Types (S&P and Moody's Rated Defaults 1985-2003)
Senior
Junior
Revolving Credit / Senior Secured Senior Unsecured
Subordinated
Subordinated
Subordinated
Term Loan
Bonds
Bonds
Bonds
Bonds
Bonds
Other
Total Instrument
Count / Average Count / Average Count / Average Count / Average Count / Average Count / Average Count / Average Count /
Stdev
/ Median Stdev
/ Median Stdev
/ Median Stdev
/ Median Stdev
/ Median Stdev
/ Median Stdev
/ Median Stdev
Cash / Inventories / Receivables
/ Guarantee
All or Non-Current Assets / Oil &
Gas Reserves
Most Assets / Real Estate
Capital Stock / Inter-company
Debt
2nd Lien
Plant, Property & Equipment
Intellectual Property
Unsecured
Total Collateral

Count / Average
Stdev / Median

115
14.46%

1.31%
6
-0.18% 13.72%

Count / Average
Sstdev / Median
Count / Average
Stdev / Median
Count / Average
Stdev / Median
Count / Average
Stdev / Median
Count / Average
Stdev / Median
Count / Average
Stdev / Median
Count / Average
Stdev / Median
Count / Average
Stdev / Median

599
33.33%
83
28.11%
124
32.11%
13
44.57%
3
0.65%
0
N/A
82
45.67%
1019
33.67%

20.25%
3.33%
17.41%
1.07%
27.46%
13.93%
52.52%
67.67%
-0.85%
-0.81%
N/A
N/A
35.06%
26.72%
20.30%
2.56%

71
31.35%
50
30.70%
90
33.44%
27
32.74%
12
43.51%
2
6.54%
1
N/A
259
33.49%

0.63%
0.03%

0
N/A

N/A
N/A

0
N/A

N/A
N/A

1
N/A

96.98%
96.98%

0
N/A

N/A
N/A

3
0.90%

0.03%
0.04%

125
33.24%

29.51%
25.04%
33.45%
34.69%
40.47%
39.56%
36.80%
49.32%
58.73%
64.98%
70.65%
70.65%
98.98%
98.98%
36.11%
32.77%

0
N/A
0
N/A
0
N/A
1
N/A
0
N/A
0
N/A
596
36.56%
597
36.56%

N/A
N/A
N/A
34.69%
N/A
N/A
18.08%
18.08%
N/A
N/A
N/A
N/A
55.03%
62.47%
54.96%
62.43%

1
N/A
0
N/A
2
17.66%
7
27.61%
0
N/A
0
N/A
423
35.17%
433
35.27%

42.51%
42.51%
N/A
N/A
84.05%
84.05%
30.37%
22.85%
N/A
N/A
N/A
N/A
67.77%
81.66%
67.18%
81.48%

1
N/A
1
N/A
0
N/A
2
13.82%
0
N/A
0
N/A
369
39.13%
374
38.95%

75.28%
75.28%
96.98%
96.98%
N/A
N/A
76.33%
76.33%
N/A
N/A
N/A
N/A
67.22%
82.84%
67.45%
82.86%

0
N/A
0
N/A
0
N/A
0
N/A
0
N/A
0
N/A
45
33.54%
45
33.54%

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
78.67%
95.25%
78.67%
95.25%

1
N/A
0
N/A
0
N/A
0
N/A
0
N/A
0
N/A
1
N/A
5
44.15%

-0.60%
-0.60%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
98.58%
N/A
19.62%
0.04%

673
33.24%
134
30.58%
216
33.46%
50
35.71%
15
45.78%
2
6.54%
1517
38.32%
2732
40.84%

1 - The ultimate dolloar loss-given-default on defaulted debt instruments, discounted at the coupon rate on defaulted debt just prior to default = 1 - (discounted recovery at emergence from bankruptcy or time of
final settlement as a percent of par).

18

Macro
econo
mic

Contractual
Features

Credit Quality /
Market

Capital
Structure

Financial Variables

Category

Table 5 - Summary Statistics on Selected Variables and Correlations with Discounted LGD1(S&P and Moody's Rated Defaults 1985-2003)

Variable
Leverage Ratio (Book Value)
Debt to EAAuity Ratio (Market)
Change in Leverage
Net Sales
Book Value
Market Value
Tobin's AA
Quick Ratio
Working Capital / Total Assets
Operating Cash Flow
Cash Flow to Current Liabilities
Return on Assets
Number of Instruments
Number of Creditor Classes
Percent Secured Debt
Percent Bank Debt
Percent Subordinated Debt
Altman Z-Score
Number of Downgrades
Credit Spread - Obligor
LGD at Default - Obligor
Credit Spread - Instrument
LGD at Default - Instrument
Cumulative Abnormal Returns
Seniority Rank
Collateral Rank
Percent Debt Below
Percent Debt Above
Time Between Defaults
Time Since Issue
Time-to-Maturity
Moody's All-Corporate Default Rate
Moody's Speculative Default Rate
S&P 500 Return

1st
25th
75th
99th
Standard
Count
Percentile Percentile Median
Mean
Percentile Percentile Deviation
440
0.3463
0.7925
0.9508
1.0616
1.1373
3.1087
0.6489
330
0.1806
0.7383
0.8705
0.8126
0.9452
0.9999
0.1856
428
-0.2318
0.0198
0.0962
0.2064
0.2219
1.6104
0.4645
441
0.1144
182.35
401.91
993.24
897.53
7911.76
2776.08
440
36.1991
206.88
454.95
1035.07
1143.92
9114.56
1566.69
329
-0.9111
1.34
1.79
1.79
2.25
3.90
0.84
299
0.0220
0.5194
0.7494
0.9255
1.1081
3.5784
0.7124
396
0.0497
0.2944
0.6634
0.8105
1.0564
3.2325
0.7152
424
-0.7045
0.0099
0.1118
0.1135
0.2264
0.6542
0.2207
411
-0.4217
-0.0619
0.0030
-0.0090
0.0392
0.2823
0.1370
384
-2.2322
-0.1586
0.0060
-0.0378
0.1309
1.5102
0.6012
427
-1.3696
-0.2259
-0.0878
-0.1786
-0.0221
0.0600
0.2637
650
650
650
650
650
295
364
650
460
2687
1118
200
2732
2732
2732
2732
2732
2364
2404
650
650
650

1.0000
1.0000
0.0000
0.0000
0.0000
-11.6200
0.0000
0.0505
-0.0073
0.0000
-0.0177
-1.2779
1.0000
1.0000
0.0000
0.0000
0.0000
0.0740
-0.2601
0.0069
0.0178
-0.0223

2.0000
2.0000
0.0858
0.0344
0.0000
-0.4078
0.0000
0.0877
0.4919
0.0250
0.4063
-0.4638
1.00
2.0000
0.00
0.0000
0.0000
1.5911
2.2486
0.0169
0.0421
-0.0069

3.0000
2.0000
0.3767
0.2717
0.1935
0.6863
1.0000
0.1027
0.6822
0.0750
0.6841
-0.1222
1.00
8.0000
0.09
0.0000
0.0000
2.6849
4.5096
0.0284
0.0639
0.0096

4.2031
2.2185
0.4167
0.3237
0.3347
0.2811
1.5797
0.2874
0.6346
0.0750
0.6841
-0.1153
1.00
8.0000
0.09
0.0000
0.0000
2.6849
4.5096
0.0291
0.0687
0.0057

5.0000
3.0000
0.6737
0.5236
0.6740
1.5194
2.0000
0.1212
0.8193
0.1125
0.8570
0.1759
2.00
8.0000
0.47
0.4111
0.0959
4.4932
7.0055
0.0412
0.0951
0.0161

31.0000
6.0000
1.0000
1.0000
1.0000
4.6266
7.3700
118.6156
0.9900
0.1695
0.9900
1.7470
4.00
8.0000
0.95
0.9729
1.7725
20.5112
23.6050
0.0534
0.1300
0.0340

3.2816
0.8942
0.3448
0.2970
0.3671
2.6240
1.6403
4.6485
0.2391
0.0860
0.2874
0.5648
0.81
2.8114
0.29
0.3005
0.3871
3.5712
4.6734
0.0137
0.0312
0.0141

Correlation
Correlation with
with Obligor Instrument
LGD
LGD
-1.79%
1.46%
0.54%
-10.55%
-3.55%
2.87%
60.97%
3.31%
69.41%
9.80%
36.70%
10.71%
11.89%
13.40%
-6.81%
2.84%
-10.53%
-7.12%
14.37%
-15.52%
10.24%
-13.01%
7.29%
-7.81%
3.52%
-5.58%
-19.78%
-23.48%
13.75%
-6.44%
23.13%
6.54%
49.08%
4.21%
46.96%
-19.60%
-4.13%
7.21%
-0.88%
-5.14%
-5.80%
3.67%
27.03%
0.18%
-1.76%
-7.29%

19

10.72%
-2.54%
-4.84%
-2.12%
7.34%
-4.60%
-11.12%
1.59%
33.88%
19.43%
66.69%
-27.09%
37.39%
48.68%
-48.86%
38.77%
-12.50%
10.25%
27.21%
2.75%
1.97%
0.00%

References
Acharya, Viral V., Bharath, Sreedhar T. and Anand Srinivasan, Does industrywide distress affect defaulted firms evidence from creditor recoveries,
London School of Business Working Paper, October 2005.
Altman, Edward I., 1968, Financial ratios, discriminant analysis and the
prediction of corporate bankruptcy, Journal of Finance, 23, 589-609.
, R. Haldeman and P. Narayanan, 1977, Zeta analysis: a
new model to predict corporate bankruptcies, Journal of Banking and Finance,
1:1, July, 29-54.
and A. Eberhart, 1994, Do seniority provision protect
bondholders investments?, Journal of Portfolio Management, Summer, 67-75.
and Vellore M. Kishore, 1996, Almost everything you
wanted to know about recoveries on defaulted bonds, Financial Analysts
Journal, Nov/Dec.
, Brady, Brooks, Resti, Andrea and Andrea Sironi, 2001,
Analyzing and Explaining Default Recovery Rates, ISDA Research Report,
London, December 2001.
, Resti, Andrea and Andrea Sironi, 2003, Default recovery
rates in Credit risk modeling: a review of the literature and empirical
evidence, NYU Solomon Center Working Paper #, 2003.
, Resti, Andrea and Andrea Sironi, 2004, The link between
default and recovery rates: theory, empirical evidence and implications, NYU
Solomon Center Working Paper #S-03-4, 2004.
and G. Fanjul, 2004, Defaults and Returns in the High
Yield Bond Market: Analysis through 2003, NYU Salomon Center Working
Paper Series#S-0304, Summer, 67-75.
Araten, Michel, Jacobs, Jr., Michael and Peeyush Varshney, Measuring Loss
Given Default on Commercial Loans for the JP Morgan Chase Wholesale Bank:
An 18 Year Internal Study, RMA Journal, May 2004, 28-35.
Asarnow, Elliot and David Edwards, 1995, Measuring loss on defaulted bank
loans: a 24-year study, Journal of Commercial Lending, Vol. 77, No.7, pp. 1123.
Black, Fischer and John C. Cox, 1976, Valuing corporate securities: some
effects of bond indenture provisions, Journal of Finance, 31, 637-659.
Carey, Mark and Michael Gordy, 2004, Measuring systematic risk in
recoveries on defaulted debt 1: firm-level ultimate LGDs , Federal Reserve
Board, Working Paper.

20

, 2005, Uncovering recoveries, Federal

Reserve Board, Working Paper, February.
Loss Given Default Study, Portfolio Management, September 1996. Chase
Manhattan Bank Memorandum.
Davidson, A.C. and D.V. Hinckley, 1997, Bootstrap Methods and their
Application (Cambridge University Press, Cambridge).
Credit Suisse Financial Products, 1997, Creditrisk+ - A Credit Risk
Management Framework, Technical Document.
Davison, A.C. and D.V. Hinkley. 1997. Bootstrap Methods and their
Application, Cambridge University Press, Cambridge.
Dev, Ashish and Michael Pykhtin, 2002, Analytical approach to credit risk
modeling, Risk, March, S26-S32.
Duffie, Darrell, 1998, Defaultable term structure models with fractional
recovery of par, Graduate School of Business, Stanford University.
and Kenneth J. Singleton, 1999, Modeling the term structures
of defaultable bonds, Review of financial studies, 12, 687-720.
and David Lando, 2000, Term structure of credit spreads with
incomplete accounting information, Econometrica, ###-###.
Eberhart, A. C., Moore, W. T. and R. T. Rosenfeldt, 1989, Security pricing and
deviations from absolute priority rule in bankruptcy proceedings, Journal of
Finance 45, 747-769
Efron, B., 1979, Bootstrap methods: another look at the jackknife, American
Statistician 7, 1-23.
Efron, B and R, Tibshirani, 1986, Bootstrap methods for standard errors,
confidence intervals, and other Measures of statistical accuracy, Statistical
Science 1, 54-75.
Emery, K, 2003, Moodys Loan Loss Database as of November 2003, Moodys
Investor Service, December.
Frye, John, 2000a, Collateral damage, Risk, April, 91-94.
, 2000b, Collateral Damage Detected, Federal reserve Bank of
Chicago, Emerging Issues Series, October, 1-14.
, 2000c, Depressing recoveries, Risk, November, 108-111.
, 2003, A false sense of security, Risk, August, 63-67.

21

Friedman, Craig and Sven Sandow, 2003, Ultimate recoveries, Risk, 69-73.
Fridson, Martin S., Garman, Christopher M. and Kathryn Okashima, 2000,
Recovery rates: the search for meaning, Merril Lynch & Co., High Yield
Research.
Frye, Jon, 2000, Collateral damage, Risk, April, 91-94.
Fitchrisk Management, North American Loan Loss Database, October 201.
Franks, Julian and Walter Torous, 1994, A comparison of financial
recontracting in distressed exchanges and Chapter 11 reorganizations,
Journal of Financial Economics, 35, 349-370.
Geske, Robert, 1977, The valuation of corporate liabilities as compound
options, Journal of Financial and Quantitative Analysis, 12, 541-552.
Gupton, G.M., Gates, D. and Lea V. Carty, 2000, Bank loan loss given default,
Moodys Investor Services, Global Credit Research, November.
, Finger, C. and Mickey Bhatia, 1997, Creditmetrics Technical
Document, J.P. Morgan & Co., New York
and Roger M. Stein, 2005, LossCalc TM V2: Dynamic Prediction of
LGD, Moodys KMV.
Hamilton, D.T., Gupton, G.M. and Alexandra Berthault, D2001, Default and
recovery rates of corporate bond issuers: 2000, Moodys Investor Services,
February.
Hotchkiss, E. S., 1993, The liquidation/reorganization choice of firms entering
chapter 11, (New York University, NY).
Hu, Yen-Ting and William Perraudin, The dependence of recovery rates and
defaults, Bank of England, 2002.
Hull, John and Alan White, 2002, The impact of default risk on options and
other derivative securities, Journal of Banking and Finance, 19, 299-322.
Jarrow, Robert A., 2001, Default parameter estimation using market prices,
Financial Analysts Journal 55:5, 75-92.
Jarrow, Robert A., Lando, David and Stuart R. Turnbull, 1997, A Markov model
for the term structure of credit spreads, Review of Financial Studies 10, 481523.
Jarrow, Robert A. and Stuart R. Turnbull, 1995, Pricing derivatives on
securities subject to credit risk, Journal of Finance 50, 53-86.

22

Jones, E.S., Mason E. and E. Rosenfeld, 1984, Contingent claims analysis of

corporate structures: an empirical investigation, Journal of Finance 39, 611627.
Keisman , David and Karen van de Castle, 2000, Suddenly structure mattered:
insights into recoveries of defaulted debt, Corporate Ratings Commentary,
Standard and Poors.
Kim, I.J., Ramaswamy, S. and S. Sundaresan, 1993, Does default risk in
coupons affect valuation of corporate bonds?: A contingent claims model,
Financial Management, 22:3, 117-131.
Longstaff, Francis A. and Eduardo S. Schwartz, 1995, A simple approach to
valuing risk fixed and floating rate debt, Journal of Finance, 89, 789-819.
Modigliani, Frank and Merton H. Miller, 1958, The cost of capital, corporation
finance, and the theory of investment, American Economic Review 48, 261297.
Pykhtin, Michael, 2003, Unexpected recovery risk, Risk, August, 74-78.
Rogueries, D. and R. Toffler, 1996, Neural networks and empirical research in
accounting, Accounting and Business Research 26, 347-55.
Schleifer, A. and R. Vishny, 1992, Liquidation values and debt capacity: a
market equilibrium approach, Journal of Finance, 47, 1343-1366.
Vasicek, Oldrich A., 1984, Credit valuation, KMV

Corporation, March.

Varma, P.R., Cantor, R. and D. Hamilton, 2003, Recovery Rates on Defaulted

Corporate Bonds and preferred Stocks, Moodys Investor Service, December.
Venables, W.N. and B.D. Ripley, 1999, Modern Applied Statistics with S-Plus,
3rd Edition (Springer-Verlag, New York).
Wilson, Thomas C., 1998, Portfolio Credit Risk, Federal Reserve Bank of New
York, Economic Policy Review, October, 71-82.
Weiss, Lawrence, 1990, Bankruptcy resolution: Direct costs and violation of
priority of claims, Journal of Financial Economics 27, 285-314
Zhou, Chunsheng, 2001, The term structure of credit spreads with default
risk, Journal of Banking and Finance 25, 2015-2040.

23