Secured debt is supposed to be well protected when things go south. However, S&P data shows that recoveries, particularly on first lien debt, are falling.
The decline reflects major changes across the debt markets:
LMEs leave distressed borrowers worse off
Capital structures have less junior debt
Covenant lite loans give lenders less control
Read the full breakdown below.
This Week’s Data
Liability Management Exercise (“LME”) Primer (Illiquid Insights)
Falling Recoveries
In recent years, intense competition between banks and private credit firms has fueled more aggressive lending. Under pressure to win deals and deploy capital, creditors have accepted weaker documentation, higher leverage and more optimistic underwriting.
The impact is now materializing in recoveries. S&P data on bankruptcy outcomes shows clear deterioration since 2023.
Average recoveries have fallen across the capital structure. Most notably, first lien recoveries dropped from 77% to 61%.
Severe losses are also becoming much more common. First lien lenders recovered less than 30 cents on the dollar in 23% of recent bankruptcies, more than triple the 7% rate before 2023.
Kicking the Can
One of the most consequential shifts in the debt markets has been the rise of liability management exercises (“LMEs”).
Increasingly, distressed companies are using flexibility in credit agreements to extend maturities, raise new capital and otherwise manage their existing debt outside of bankruptcy.