New York University Salomon Center Leonard N. Stern School

New York University Salomon Center

Leonard N. Stern School of Business

Special Report On

Defaults and Returns in the High-Yield Bond and Distressed Debt

Market:

The Year 2009 in Review and Outlook

By

Edward I. Altman

with

Brenda J. Karlin

February 08, 2010

February 08, 2010 Altman High-Yield Bond Default and Return Report

2

Contents

Executive Summary ....................................................................................................................................... 3

Defaults, Default Rates, and Recoveries ........................................................................................................ 4

Bankruptcies .................................................................................................................................................. 8

Industry Defaults .......................................................................................................................................... 10

Age of Defaults ............................................................................................................................................ 11

Fallen Angel Defaults .................................................................................................................................. 12

Default Losses and Recoveries .................................................................................................................... 14

Distressed Exchanges................................................................................................................................... 17

Liquidation Recoveries ................................................................................................................................ 21

Forecast Recovery Versus Actual ................................................................................................................ 24

Related Recovery Statistics .......................................................................................................................... 25

Mortality Rates and Losses .......................................................................................................................... 29

Returns and Spreads ..................................................................................................................................... 30

New Issues and Other Changes in the High-Yield Market .......................................................................... 33

Credit Quality and Trends in New Issuance ................................................................................................ 33

Proportion and Size of the Distressed and Defaulted Public and Private Debt Markets .............................. 34

Forecasting Default Rates and Recoveries ................................................................................................... 37

Appendix A: Quarterly Default Rate Comparison ....................................................................................... 41

Appendix B: Defaulted Corporate Straight Debt Issues .............................................................................. 43

Appendix C: Distressed Exchanges ............................................................................................................. 51

Appendix D: Leveraged Loan Defaults ....................................................................................................... 52

Appendix E: Chapter 11 Filings by Liability Size ....................................................................................... 54

Appendix F: Defaults by Industry ................................................................................................................ 58

Appendix G: 2009 Emergences from Default .............................................................................................. 61

Acknowledgments

Dr. Altman is the Max L. Heine Professor of Finance and Director of the Credit and Debt

Markets Research Program at the NYU Salomon Center, Leonard N. Stern School of Business

and a consultant to Paulson & Co. Brenda Karlin is a Research Associate at the NYU Salomon

Center. We appreciate the assistance of Vallabh Muralikrishnan and Hemant Sharma of the NYU

Salomon Center and the several market makers who provided us with price quotations. We offer a

special thanks to the various rating agencies, Daniel Sweeney and Johnathan Blau of Credit

Suisse, Steven Miller of S&P LCD, Kerry Mastroianni of New Generation Research and Daniel

Kamensky of Paulson & Co..


3

From a default and performance perspective, the year 2009 proved to be a year

of incredible contrasts for investors in high yield bonds, with a record amount

of defaults ($123.8 billion) occurring, surpassing the previous record in 2002

($96.8 billion). However, absolute returns and returns versus 10-yr Treasuries

were at their highest historical levels, new issuance increased more than three-

fold in a one-year period, and only 15% of high-yield bonds outstanding were

classified as distressed by year-end, compared to 82% one year earlier.

In several ways, 2009 was reminiscent of 1991 when the default rate also

topped 10 percent, yet absolute and relative returns (43.23% and 26.05%)

registered record high levels (to that point). In both years, investors had

expected much worse conditions in the subsequent year, and required yield

spreads at the start of each year were at record-high levels.

The default rate rose to 10.74%, the highest annual default rate since 2002, and

the second highest default rate in our entire time series. The fourth-quarter 2009

default rate was 2.59%, increasing from the third-quarter 2009, but at a lower

level than one year earlier (2.90%).

Default losses on high-yield bonds came in at 7.30%, based on a weighted

average recovery rate of 36.1% just after default, slightly below the historical

average. The weighted average recovery on bankruptcy and payment defaults

was somewhat lower at 34.6%, compared to 42.7% for distressed exchange

default recoveries.

Returns on high-yield bonds reached historically high levels, ending the year at

55.19% (Citi Index). The excess return versus 10-yr US Treasuries was 65.11%,

more than double the previous record high of 29.37% in 2003. Yield-to-

maturity spreads versus 10-yr US Treasuries decreased to 5.13% by year-end

2009, 1,218bp lower than year-end 2008, but in-line with the historical average

of 5.23%. Defaulted bonds and bank loans also did extremely well, with a

combined return of 56.0%.

The distressed ratio of bonds yielding more than 1,000bp above the risk-free

rate decreased dramatically to 15.3% as of the end of 2009, from 26.8% three

months earlier and an astonishing 82.0% at year-end 2008. This metric has

decreased steadily over the ensuing thirteen months.

Estimates of the face value size of the distressed and defaulted debt markets

decreased significantly to $1.61 trillion, as of December 31, 2009, down more

than 50% from $3.59 trillion one year earlier. This decrease is attributable to the

dramatic drop in the distressed ratio. The market value estimate also decreased

to approximately $1.01 trillion.

Based on our mortality rate methodology and new issuance in the last ten years,

stratified by original bond rating, the Altman forecast for the high-yield bond

market’s default rate in 2009 was 7.98%, and based on several different models

was 13.6%, compared to an actual default rate of 10.74%. This year, based on

four different methodologies, the 2010 forecasts range from 3.86% (distressed

ratio method) to 14.00% (recession scenarios method), with the consensus

average rate of 6.70%, if the economy ―double-dips‖ into a recession or never

emerges from the current downturn, and 4.27% if it does not.


4

Defaults, Default Rates, and Recoveries

The high-yield bond default rate in 2009 soared to levels unprecedented over the past

seven years. 2009 witnessed the second highest dollar denominated default rate in

our time series (from 1971), lower only than the rate realized in 2002. The rate

increased from 4.65% at year-end 2008 to 10.74% for all of 2009. Defaults include

straight corporate bonds whose firms went bankrupt, missed an interest payment and

did not cure it within the grace or forbearance period, or completed a distressed

exchange. The 2009 rate is based on a mid-year market size of $1.153 trillion, up by

$62 billion from a year earlier. In all, $123.8 billion of defaults, the largest dollar

amount ever, was recorded in 2009 (Figure 1), surpassing 2002 by $27 billion. Note

in Figure 1 that the historical weighted-average annual default rate is 4.55% over the

39 year period (1971-2009). This weighted-average rate is up considerably compared

to 3.94% at the end of 2008. Our weights are based on the par value of high-yield

bonds outstanding in each year. The arithmetic annual average default rate climbed

to 3.33% from 3.14% one year earlier.

In the fourth quarter of 2009, the default rate was 2.59%, larger than one quarter earlier

(0.83%), but lower than both the first two quarters of 2009 as well as the fourth quarter

of 2008 (Figure 2 and Appendix A). Two-thirds of the dollar amount of defaults in the

fourth quarter was related to the bankruptcy filing by CIT Group. Indeed, had this

default not occurred, the quarterly default rate would have been a mere 0.74%, the

lowest since the third-quarter 2008, indicating a slow-down in the rapid pace of defaults

which has plagued the market in the past year. Eighteen issuers defaulted in the fourth

quarter on 76 issues. The most sizeable defaults during the year were CIT, defaulting on

over $22 billion of outstanding bonds, Charter Communications, defaulting on almost

$13 billion, and General Motors, which defaulted on over $10 billion. Abitibi Bowater,

Ford Motor, Harrah’s, Nortel, and R.H. Donnelley each defaulted on outstanding bonds

of more than $3 billion. In all, 119 issuers constituting 405 issues defaulted in 2009

(Appendix B), considerably greater than the 63 issuers and 154 issues that defaulted in

2008. The average dollar amount of defaulting bonds per defaulting issuer in 2009 was

$1.04 billion, compared to $796 million in 2008, and $288 million in 2007. Lehman

Brothers is not included in the 2008 statistics since its bonds were not rated non-

investment grade before defaulting.

In our default statistics, we include those bonds from distressed exchanges actually

tendered. For example, in the Ford Motor Co. exchange, $3.35 billion of bonds were

exchanged of the $8.2 billion outstanding and subject to the exchange offer. In 2009,

there were a record 53 distressed exchanges, involving 45 companies, comprising

$22.9 billion of defaults (18.5% of the total). See Appendix C for the list of 2009

distressed exchanges and later our discussion of these restructurings.

In 2009, S&P and Moody’s issuer-denominated default rates were 10.93% and

13.22%, respectively. Moody’s 16.50% dollar-denominated default rate was greater

than its issuer-denominated rate, as is usually the case in a stressed year. Fitch’s

dollar-denominated default rate for 2009 was 13.70%.

The issuer-based default rate for the last 12 months in the US leveraged loan market

was 8.07% (Figure 3), and 9.61% based on amount of issuance, according to S&P’s

LCD compilations. This is in contrast to the significantly smaller rates of 4.35% and


5

3.75%, respectively, at the end of 2008. Sixty-four leveraged loan issuers defaulted

in 2008 (Appendix D), compared to forty-one in 2008. According to our comparison

between high-yield bond defaults (Appendix B) and leveraged loan defaults

(Appendix D), 27 firms had both bonds and leveraged loans default in 2009.

Since the U.S. economy went into a recession in December 2007, and technically

was still in recession in 2009, both 2008 and 2009 are included as recession years.

Whereas the default rate began increasing two years, or so, before the start of the two

prior recessions, this time the increase in default rates coincided with the beginning

(Figure 4). In all five prior recessions since 1972, it is clear that the default rates

peaked near the end, or soon after the recession. Since 2010’s economic outlook is

highly uncertain, our default rate forecast will be based on both recession and non-

recession scenarios.


6

Figure 1. Historical Default Rates — Straight Bonds Only, Not

Including Defaulted Issues From Par Value Outstanding, 1971–2009

(Dollars in Millions)

Par Value

Year

Outstandinga

($) Defaults ($)

Default Rates

(%)

2009 1,152,952 123,824 10.740

2008 1,091,000 50,763 4.653

2007 1,075,400 5,473 0.509

2006 993,600 7,559 0.761

2005 1,073,000 36,209 3.375

2004 933,100 11,657 1.249

2003 825,000 38,451 4.661

2002 757,000 96,858 12.795

2001 649,000 63,609 9.801

2000 597,200 30,295 5.073

1999 567,400 23,532 4.147

1998 465,500 7,464 1.603

1997 335,400 4,200 1.252

1996 271,000 3,336 1.231

1995 240,000 4,551 1.896

1994 235,000 3,418 1.454

1993 206,907 2,287 1.105

1992 163,000 5,545 3.402

1991 183,600 18,862 10.273

1990 181,000 18,354 10.140

1989 189,258 8,110 4.285

1988 148,187 3,944 2.662

1987 129,557 7,486 5.778

1986 90,243 3,156 3.497

1985 58,088 992 1.708

1984 40,939 344 0.840

1983 27,492 301 1.095

1982 18,109 577 3.186

1981 17,115 27 0.158

1980 14,935 224 1.500

1979 10,356 20 0.193

1978 8,946 119 1.330

1977 8,157 381 4.671

1976 7,735 30 0.388

1975 7,471 204 2.731

1974 10,894 123 1.129

1973 7,824 49 0.626

1972 6,928 193 2.786

1971 6,602 82 1.242

Standard

Deviation (%)

Arithmetic Average

Default Rate

1971 to 2009 3.331 3.224

1978 to 2009 3.636 3.422

1985 to 2009 4.322 3.548

Weighted Average

Default Rateb

1971 to 2009 4.550

1978 to 2009 4.561

1985 to 2009 4.598

Median Annual Default

Rate

1971 to 2009 1.896

a As of midyear.

b Weighted by par value of amount outstanding for each year.

Source: NYU Salomon Center.


7

Figure 2. Quarterly and the Four-Quarter Moving Average Default Rate

1989–2009

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

198919901991199219931994199519961997199819992000200120022003200420052006200720082009

Qu

arte

rly

Def

ault

Rat

e

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

4 -

Qu

arte

r M

ovin

g A

vera

ge

Quarterly

Moving


Figure 3. S&P Leveraged Loan Index 12-Month Moving Average Default

Rate 1998–2009 (Number of Issuers)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Dec-98

Jun-99

Dec-99

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Source: Standard & Poor’s LCD.

Figure 4. Historical Default Rates and Recession Periods in the US

High-Yield Bond Market, 1972–2009

Periods of Recession: 11/73–3/75, 1/80–7/80, 7/81–11/82, 7/90–3/91, 4/01–12/01, 12/07–

12/09 (still continuing as of 12/09).

Sources: Figure 1 of this report and National Bureau of Economic Research.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08


8

Bankruptcies

As can be seen in Figure 5, the amount of total liabilities for Chapter 11 bankruptcies

in 2009 was $604.0 billion, based on 234 filings. Where total liabilities exceeded

$100 million, the total liabilities for filings in 2009 are larger than any prior year,

except for last ($720.8 billion), which included the Lehman Brothers’ filing. General

Motors Corp. was the largest bankruptcy filing in 2009, with $172.8 billion in

liabilities. Without Lehman, this past year’s liabilities in bankruptcy would have

exceeded 2008 by almost $500 billion, and would be greater than the previous peak

in 2002 by almost $250 billion.

Appendix E lists this year’s large Chapter 11 bankruptcies. Our bankruptcy list

includes a large number of LBOs. So far this year, there were 74 bankrupt LBOs (six

in which the PE firm had only a minority interest), 25 more than the 49 of such

filings for all of 2008.1

Figure 5. Total Filings and Liabilitiesa of Public Companies Filing

for Chapter 11 Protection, 1989–2009

$0

$100

$200

$300

$400

$500

$600

$700

$800

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 (Excl. LEH

)

08 (Incl. LEH

)

2009

$ B

illi

on

0

40

80

120

160

200

240

280

Pre- Petition Liabilities, in $ billions (left axis)

Number of Filings (right axis)

2009

234 filings and liabilities of

$604.0 billion

2008

Excluding Lehman

Brothers

145 filings and

liabilities of

$107.8 billion

Including Lehman

Brothers

146 filings and

liabilities of $720.8

billion

a Minimum $100 million in liabilities.

Sources: Appendix E from the NYU Salomon Center Bankruptcy Filings Database.

The number of billion-dollar bankruptcies in 2009 increased two-fold from 21, last

year, to 43, higher than the 41 recorded in 2002, the prior record year. The majority

of the larger bankruptcies were in the auto/motor carrier, financial services,

communications, and construction/real estate sectors (Appendix D).

According to New Generation Research, the number of public companies filings was

207 (Figure 6). The average of total liabilities for all 234 bankruptcy filings in 2009

was $2.6 billion, down from $4.9 billion one year earlier. The latter figure would

have been just 0.7 billion without Lehman.

1 List compiled by E. Griffith, published on www.pehub.com.

http://www.pehub.com/


9

Figure 6. Historical Bankruptcy Filings 1980–2008

Year Total Filingsa

Total Filingsb

(>$100

Million)

Total Filings

(≥$1 Billion)

Total

Liabilitiesb

($ MN)

(>100 Million)

Average

Liabilitiesb

($ MN)

(>100 Million)

1980 62 4 0 746.0 186.5

1981 74 6 1 3960.0 660.0

1982 84 12 3 7113.0 592.8

1983 89 14 3 13674.0 976.7

1984 121 12 0 3440.0 286.7

1985 149 14 2 8605.2 614.7

1986 149 11 3 9335.4 850.5

1987 112 12 1 25421.0 2118.4

1988 122 14 2 6905.0 493.2

1989 135 22 10 33538.9 1524.5

1990 115 35 10 41115.1 1174.7

1991 123 51 11 81157.9 1591.3

1992 91 37 14 64224.1 1735.8

1993 86 37 4 17701.1 478.4

1994 70 24 1 8396.0 349.8

1995 85 32 7 27153.0 848.5

1996 86 32 0 11687.0 365.2

1997 83 36 5 18865.9 524.1

1998 122 56 6 32038.3 572.1

1999 145 109 19 70957.1 651.0

2000 179 136 23 98895.8 727.2

2001 263 169 38 228604.1 1352.7

2002 220 135 41 336611.7 2493.4

2003 172 102 26 115171.8 1129.1

2004 92 44 11 39549.7 898.9

2005 86 34 10 141525.2 4162.5

2006 66 32 4 22321.6 697.6

2007 78 38 8 72642.7 1911.7

2008 136 147 21 721009.8 4904.8

2009 207 234 43 603992.3 2581.2

Total 3602 1641 327 2,866,382.3 1,746.7

a Represents both Chapter 7 and 11 public company filings (Source: New Generation

Research). b

Filings of all companies, including private firms, with Total Liabilities

greater than $100 million (Source: NYU Salomon Center Bankruptcy Filings Database). c

Filings with Total Liabilities greater than $1 billion (Source: NYU Salomon Center

Bankruptcy Filings Database).

In Figure 7, we compare the date of default with the Chapter 11 filing date for firms

that defaulted on bonds and also went bankrupt going back to 1981. Based on 833

observations from the NYU Salomon Center Master Default and Bankruptcy

Databases, both events occurred on the same date in 408 instances (49%). In the

remaining 51% of the cases, the lag between the default date and bankruptcy date

varied considerably, with decreasing levels as the two dates became further separated

from each other. Of course, some defaulting issuers never formally file for

bankruptcy as their problems are settled out of court or the default comes as a result

of a distressed exchange, and they do not file for bankruptcy in subsequent years

(many do, however – see our discussion at a later point).


10

Figure 7. Time Differential Between Default and Bankruptcy Filinga

(1981–2009)

0%

10%

20%

30%

40%

50%

60%

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 29 31 33 35

Number of Months Lag

% o

f the

Tot

al O

bser

vatio

ns

*Based on 833 observations

Source: NYU Salomon Center Default and Bankruptcy Filings Databases

(408)

a

Based on 833 observations.

Source: NYU Salomon Center Default and Bankruptcy Filings Databases.

Industry Defaults

Figure 8 lists the number of high-yield bond defaults by industry. Of the total 119

defaulting issuers in 2009, general manufacturers, communications and media,

leisure and entertainment, and real estate/construction were industries in which a

total of 78 firms defaulted. Nine issuers defaulted in the auto/motor carrier sector,

eight in energy, and seven in both financial services and transportation. The

remaining ten defaulting issuers were spread over various industries. Appendix E

presents a more detailed breakdown of all 119 defaulting issuers.

Figure 9 shows high-yield corporate bond defaults across industries per dollar

amount since 1990. Communications and media ―lead‖ the 2009 totals, due primarily

to the Charter Communications and R.H. Donnelley defaults. As in the past, we

observe that the communications and media sector far outdistanced all other sectors

in the dollar amount of defaulting issues over the last 19 years, primarily the result of

the telecom meltdown during 2000–02, as well as 2009’s defaults due to large-scale

bankruptcies.


11

Figure 8. Corporate Bond Defaults by Industry (Number of Companies)

Industry 1970–89 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total

Auto/Motor

Carrier

6 3 1 1 1 4 3 8 9 36

Conglomerates 5 1 3 3 1 1 1 15

Energy 35 4 2 3 1 1 13 1 8 9 1 1 4 8 91

Financial

Services

21 7 14 3 2 1 2 1 2 6 1 6 4 5 6 2 3 2 5 7 100

Leisure/Entertai

nment

9 8 2 4 3 4 3 1 5 5 8 9 6 5 6 3 10 12 103

General

Manufacturing

26 5 8 8 7 3 8 6 7 6 16 23 43 22 13 17 12 6 7 10 35 288

Health Care 4 2 1 1 1 2 2 8 6 3 4 3 2 1 1 41

Miscellaneous

Industries

16 4 4 3 1 1 1 3 3 16 34 38 25 16 6 1 4 3 4 5 188

Real

Estate/Construct

ion

14 7 5 1 2 1 2 1 4 6 4 3 2 1 6 11 70

REIT 12 1 1 14

Retailing 10 6 15 6 4 5 6 3 6 6 12 7 12 5 5 3 2 2 3 5 5 128

Comm. & Media 17 3 4 1 1 3 2 2 1 6 11 8 39 26 21 6 3 2 4 10 20 190

Transportation

(Non Auto)

9 1 2 2 2 1 8 5 7 7 6 2 5 1 7 65

Utilities 2 1 1 1 1 0 0 6

Total 186 47 62 34 22 19 28 15 29 37 98 107 156 112 86 39 34 23 19 63 119 1,335


Figure 9. Corporate Bond Defaults by Industry (Dollars in Millions)

Industry 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total

Auto/Motor

Carrier

468 90 215 300 100 430 120 3,737 285 280 3,573 2,692 1,382 16,872 30,544

Conglomerates 100 690 275 1,065

Energy 60 103 600 75 100 3,812 217 4,200 4,085 11,857 8,895 50 1,511 1,993 37,558

Financial

Services

928 696 536 78 687 700 66 689 375 1,968 5,062 3,803 1,079 110 541 156 26,973 29,274 73,721

Leisure/

Entertainment

498 1,191 159 138 435 293 245 1,100 2,891 3,437 21,242 633 1,286 6,861 715 6,022 10,395 57,541

General

Manufacturing

2,675 3,695 488 118 616 641 123 247 2,092 2,507 3,138 2,455 2,108 225 1,396 1,486 2,379 3,747 25,766 55,902

Health Care 18 1,120 75 125 2,214 1,715 692 115 3,843 360 520 150 10,947

Miscellaneous

Industries

1,968 4,911 1,378 1,056 317 1,286 832 461 1,290 7,615 8,352 9,715 5,594 4,494 1,977 569 409 1,396 1,505 1,787 56,912

Real Estate/

Construction

2,605 417 113 49 75 190 258 383 385 252 1,110 1,088 77 1,783 174 2,158 4,803 15,921

Retailing 4,443 2,937 1,489 18 2,814 395 164 2,504 1,241 2,052 3,081 1,586 4,092 877 749 1,059 332 363 1,412 1,015 32,623

Communications

& Media

460 286 1,549 2,980 5,983 34,827 47,953 7,603 2,551 150 1,496 765 5,904 30,954 143,461

Transportation

(Non Auto)

1,028 1,452 301 562 1,125 310 2,890 1,430 4,711 2,086 2,421 12,376 272 964 31,928

Utilities 1,452 617 85 275 202 75 1,150 1,417

5,273

Total 14,631 18,021 4,883 1,926 3,723 4,536 3,465 4,200 6,994 23,440 29,976 68,934 96,673 36,764 11,657 35,954 7,559 5,473 50,763 123,824 552,801


Age of Defaults

Figure 10 shows the age distribution of defaults in 2009 and for the period 1991–

2009. It appears normal that the number of defaults is low in the first year after

issuance. What typically follows is an increase in default rates in years two through

four. Indeed, 2009 essentially mirrors the cumulative default proportions over 1991–

2009, in terms of marginally increasing default frequencies in years one through

three, slightly lower rates in years four and five versus three. There was a somewhat

interesting increase in six-year-old issues and a disproportionately large cohort


12

(15%) of bonds issued ten or more years prior to default. Many bonds that were ten

years or older that defaulted in 2009 were originally investment-grade issues. Again,

as in 2008, a small proportion (5%) defaulted during the first year after issuance. The

historical average is 8%.

Figure 10. Distribution of Years to Default From Original Issuance Date (By Year of

Default), 1991–2009

1991 1992 1993/1994 1995 1996/1997 1998 1999 2000 2001

Years

to No. of % of No. of % of No. of % of No. of % of No. of % of No. of % of No. of % of No. of % of No. of % of

Default Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total

1 0 0 0 0 3 8 1 3 7 14 2 6 32 26 19 10 40 12

2 18 13 0 0 6 16 9 28 7 14 5 15 37 30 51 28 69 21

3 26 19 7 13 5 14 7 22 7 14 10 30 15 12 56 31 87 26

4 29 21 10 19 2 5 3 9 17 36 3 9 14 11 14 8 65 19

5 35 26 8 15 4 11 1 3 4 8 10 30 7 6 13 7 27 8

6 10 7 12 22 8 22 2 6 5 10 2 6 8 6 5 3 14 4

7 4 3 5 9 7 19 2 6 0 0 1 3 10 8 12 7 21 6

8 10 7 4 7 0 0 2 6 0 0 0 0 2 2 4 2 5 1

9 3 2 0 0 0 0 4 13 0 0 0 0 0 0 3 2 4 1

10+ 2 1 8 15 2 5 1 3 2 4 0 0 0 0 6 3 3 1

Total 137 100 54 100 37 100 32 100 49 100 33 100 125 100 183 100 335 100

2002 2003 2004 2005 2006 2007 2008 2009 1991–2009

Years

to

No. of

% of

No. of

% of

No. of

% of

No. of

% of

No. of

% of

No. of

% of

No. of

% of

No. of

% of

No. of

% of

Default Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total Issues Total

1 29 8 18 9 8 10 16 9 2 4 1 3 9 6 20 5 207 8

2 51 15 30 15 7 9 13 7 4 8 1 3 18 12 39 10 365 15

3 61 18 26 13 8 10 9 6 6 12 6 17 34 22 65 16 435 18

4 56 16 23 11 6 8 22 12 5 10 9 26 30 19 61 15 369 15

5 45 13 40 20 10 13 14 8 4 8 3 9 20 13 51 13 296 12

6 21 6 20 10 16 21 17 9 9 17 4 11 10 6 58 14 221 9

7 8 2 25 12 9 12 13 7 6 12 2 6 9 6 15 4 149 6

8 7 2 3 1 6 8 11 6 7 13 5 14 6 4 18 4 90 4

9 12 3 5 2 1 1 5 3 6 12 1 3 7 5 16 4 67 3

10+ 54 16 13 6 6 8 64 34 3 6 3 9 11 7 62 15 240 10

Total 344 100 203 100 77 100 184 100 52 100 35 100 154 100 405 100 2,439 100


Fallen Angel Defaults

Twenty-three issuers (19% of the total in 2009) were responsible for 129 (32% of the

total) defaulting issues that were investment grade at some time prior to default. This

results in a fallen-angel issuer default rate of 8.07%, considerably higher than the

historical average of 3.88% (Figure 11). The fallen-angel default rate for 1985–2009

is slightly below the historical average annual rate for original issue defaults in the

high-yield bond market (4.60%). This differential (3.88% vs. 4.60%), however, is not

statistically significant due to a relatively high standard deviation of around 260bp

per year between the two rates. Figure 12 shows the fallen angel proportion of

defaults from 1977 to the present. In 2009, 32% of defaulted issues were originally

rated investment grade, somewhat above the historical average of 27%.


13

Figure 11. Fallen Angels Versus Original(S&P)Issue and All High

Yield Default Ratesa (In Percent)

Year

Fallen Angel

Average

12-Mo. Default

Rate

Original Issue

Speculative Grade

Default Rates

All Speculative

Grade Bond

Default Rates

Altman Dollar

Weighted Annual

Default Rates

2009 8.07 11.89 10.93 10.74

2008 3.07 4.34 4.02 4.60

2007 0.86 1.00 0.97 0.51

2006 1.40 1.23 1.26 0.76

2005 2.74 3.70 2.48 3.37

2004 0.83 2.65 2.23 1.25

2003 5.88 5.46 5.53 4.66

2002 6.59 8.55 8.32 12.79

2001 8.46 10.14 10.99 9.81

2000 7.01 7.10 7.03 5.07

1999 4.01 5.10 4.62 4.15

1998 3.31 2.75 2.23 1.60

1997 2.04 2.10 1.71 1.25

1996 1.38 2.00 1.71 1.23

1995 0.25 3.90 3.07 1.90

1994 0.00 2.31 1.70 1.45

1993 1.72 1.99 1.79 1.10

1992 4.50 5.48 5.45 3.40

1991 7.53 10.86 11.66 10.27

1990 5.77 8.30 8.20 10.14

1989 3.74 4.93 5.33 4.29

1988 4.25 3.39 3.95 2.66

1987 4.36 2.92 2.41 5.78

1986 2.46 6.29 4.78 3.50

1985 6.77 4.06 3.24 1.71

Arithmetic Average

3.88 4.90 4.62 4.32

Standard Deviation

2.51 2.99 3.15 3.55

a All S&P issuer based except for Altman rates.

Sources: NYU Salomon Center and S&P.


14

Figure 12. Fallen Angel Defaulted Issues by Original Rating, 1977-

2009

Year Total No. Defaulted Issuesa

Originally Rated Investment

Grade (%)

2009 405 32

2008 154 31

2007 35 11

2006 52 13

2005 184 49

2004 79 19

2003 203 33

2002 322 39

2001 258 14

2000 142 16

1999 87 13

1998 39 31

1997 20 0

1996 24 13

1995 29 10

1994 16 0

1993 24 0

1992 59 25

1991 163 27

1990 117 16

1989 66 18

1988 64 42

1987 31 39

1986 55 15

1985 26 4

1984 14 21

1983 7 43

1982 20 55

1981 1 0

1980 4 25

1979 1 0

1978 1 100

1977 2 100

Total 2,704 27%

a Where we could find an original rating from either S&P or Moody's.

Sources: Moody's, NYU Salomon Center, and S&P.

Default Losses and Recoveries

The weighted-average recovery rate (based on market prices just after defaults) on

high-yield bond defaults in 2009 remained below the historic average of 44.8% to

end the year at 36.1%. This is lower than the recovery rate of 42.5% in 2008, and is

the lowest rate since 2002. The default loss rate in 2009, without an adjustment for

fallen angels and including the loss of 0.438% (43.8bp) from lost coupons, was

approximately 730.0bp (Figure 13). If we remove fallen angel defaults (129 issues)

the loss would have been 1,009.2bp on original issue high-yield bonds.

Unlike the prior two quarters, the recovery rate on fallen angels was higher than on

original non-investment grade bonds demonstrating a return to the norm. This was

the result of the CIT defaults, which recovered roughly 65%, diluting the effect of

the GM default earlier in the year, which had recovered only about 10%. Over the

32-year period from 1978 to 2009, the arithmetic average annual loss rate on high-

yield bond defaults is 2.45%, 3.09% on a weighted-average basis (Figure 14).


15

Figure 13. 2009 Default Loss Rate

Unadjusted for

Fallen Angels

(%)

Only Fallen

Angels (%)

All Except

Fallen Angels

(%)

Price Adjusted

for

Fallen Angels

(%)

Background Data

Average Default Rate 10.740 8.070 13.644 11.462

Average Price At Defaulta 36.133 43.224 30.784 35.655

Average Price At Downgradeb 81.04

Average Recovery 36.133 53.337 30.784 39.614

Average Loss Of Principal 63.867 46.663 69.216 60.386

Average Coupon Payment 8.163 5.856 9.504 8.076

Default Loss Computation

Default Rate 10.740 8.070 13.644 11.462

X Loss Of Principal 63.867 46.663 69.216 60.386

Default Loss of Principal 6.859 3.766 9.443 6.921

Default Rate 10.740 8.070 13.644 11.462

X Loss of 1/2 Coupon 4.082 2.928 4.752 4.038

Default Loss of Coupon 0.438 0.236 0.648 0.463

Default Loss of Principal

and Coupon

7.297 4.002 10.092 7.384

a If default date price is not available, end-of-month price is used.

b Downgrade to non-

investment grade. Note: Average Default Rate of “Only Fallen Angels” is based on number

of issuers.

Sources: NYU Salomon Center and various dealer quotes.


16

Figure 14. Default Rates and Losses,a 1978–2009 (Dollars in Millions)

Year

Par Value

Outstandinga

($)

Par Value

of Default

($)

Default

Rate (%)

Weighted

Price After

Default ($)

Weighted

Coupon (%)

Default Loss

(%)b

2009 1,152,952 123,824 10.74 36.1 8.16 7.30

2008 1,091,000 50,763 4.65 42.5 8.23 2.83

2007 1,075,400 5,473 0.51 66.6 9.64 0.19

2006 993,600 7,559 0.76 65.3 9.33 0.30

2005 1,073,000 36,209 3.37 61.1 8.61 1.46

2004 933,100 11,657 1.25 57.7 10.30 0.59

2003 825,000 38,451 4.66 45.5 9.55 2.76

2002 757,000 96,858 12.79 25.3 9.37 10.15

2001 649,000 63,609 9.80 25.5 9.18 7.76

2000 597,200 30,295 5.07 26.4 8.54 3.95

1999 567,400 23,532 4.15 27.9 10.55 3.21

1998 465,500 7,464 1.60 35.9 9.46 1.10

1997 335,400 4,200 1.25 54.2 11.87 0.65

1996 271,000 3,336 1.23 51.9 8.92 0.65

1995 240,000 4,551 1.90 40.6 11.83 1.24

1994 235,000 3,418 1.45 39.4 10.25 0.96

1993 206,907 2,287 1.11 56.6 12.98 0.56

1992 163,000 5,545 3.40 50.1 12.32 1.91

1991 183,600 18,862 10.27 36.0 11.59 7.16

1990 181,000 18,354 10.14 23.4 12.94 8.42

1989 189,258 8,110 4.29 38.3 13.40 2.93

1988 148,187 3,944 2.66 43.6 11.91 1.66

1987 129,557 7,486 5.78 75.9 12.07 1.74

1986 90,243 3,156 3.50 34.5 10.61 2.48

1985 58,088 992 1.71 45.9 13.69 1.04

1984 40,939 344 0.84 48.6 12.23 0.48

1983 27,492 301 1.09 55.7 10.11 0.54

1982 18,109 577 3.19 38.6 9.61 2.11

1981 17,115 27 0.16 72.0 15.75 0.15

1980 14,935 224 1.50 21.1 8.43 1.25

1979 10,356 20 0.19 31.0 10.63 0.14

1978 8,946 119 1.33 60.0 8.38 0.59

Arithmetic Average 1978–2009 3.64 44.79 10.64 2.45

Weighted Average 1978–2009 4.56 3.09

a Excludes defaulted issues.

b Default loss rate adjusted for fallen angels is 9.3% in

2002, 1.82% in 2003, 0.59% in 2004, 1.56% in 2005, 0.039% in 2006, 0.20% in 2007, 3.42%

in 2008, and 7.38% in 2009.


Figure 15 lists the average recovery rate by seniority for 1978–2009. The recoveries

on all seniorities were significantly lower than the historical norms. In 2009, 29 of

the defaulting issues were senior secured, with an average recovery rate of 43.70%,

compared to a historical average of 57.8% (57.4% median). This is higher than the

third-quarter recovery of 38.74%, primarily due to a Nortek, Inc. senior secured

default of $750 million with a recovery rate of 101%. Two hundred twenty-six of the

issues were senior unsecured with an average recovery rate of 37.2%, compared to a

historical average of 37.7% (45.6% median). This rate was largely affected by the

low recovery rates of several large, defaulting issuers, including Abitibi Bowater,

General Motors, and Charter Communications.

There were 31 issues that were senior subordinated with an average recovery of

24.1%, compared to a historical average of 30.6% (32.7% median). Four were

subordinated with an average recovery of 12.6%, compared to a historical average of

30.9% (29.7% median). Seven were issued as either discount or zero coupon notes

with an average recovery of 16.8% compared to a historical average of 25.4%

(18.2% median). One hundred eight issues could not be priced. The historic 31-year


17

median for all high-yield bond defaults stayed constant at 41.8%, while the

arithmetic average dropped slightly to 37.6%. These latter statistics are based on a

sample of over 2,500 defaults.

Figure 15. Weighted Average Recovery Rates on Defaulted Debt by Seniority per $100 Face

Amount, 1978–2009

Senior Secured Senior Unsecured

Senior

Subordinated Subordinated

Discount and

Zero Coupon

All

Seniorities

Default

Year No. % $ No. % $ No. % $ No. % $ No. % $ No. $

2009 29 10 43.70 226 76 37.22 31 10 24.06 4 1 12.57 7 2 16.84 297 36.13

2008 18 14 30.52 79 63 49.56 23 18 30.25 4 3 21.09 1 1 2.71 125 42.52

2007 10 36 87.24 10 36 47.70 6 21 63.98 2 7 46.53 0 0 0.00 28 66.65

2006 9 18 90.60 26 52 60.90 8 16 50.24 1 2 60.33 6 12 78.31 50 65.32

2005 67 54 76.50 44 36 45.88 7 6 32.67 0 0 0.00 5 4 74.21 123 61.10

2004 27 39 63.67 33 48 56.77 2 3 37.44 0 0 0.00 7 10 43.06 69 57.72

2003 57 28 53.51 108 53 45.40 29 14 35.98 1 0 38.00 8 4 32.27 203 45.58

2002 37 11 52.81 254 75 21.82 21 6 32.79 0 0 0.00 28 8 26.47 340 25.30

2001 9 3 40.95 187 67 28.84 48 17 18.37 0 0 0.00 37 13 15.05 281 25.62

2000 13 8 39.58 47 29 25.40 61 37 25.96 26 16 26.62 17 10 23.61 164 26.74

1999 14 11 26.90 60 47 42.54 40 31 23.56 2 2 13.88 11 9 17.30 127 27.90

1998 6 18 70.38 21 62 39.57 6 18 17.54 0 0 0.00 1 3 17.00 34 40.46

1997 4 16 74.90 12 48 70.94 6 24 31.89 1 4 60.00 2 8 19.00 25 57.61

1996 4 17 59.08 4 17 50.11 9 38 48.99 4 17 44.23 3 13 11.99 24 45.44

1995 5 15 44.64 9 27 50.50 17 52 39.01 1 3 20.00 1 3 17.50 33 41.77

1994 5 23 48.66 8 36 51.14 5 23 19.81 3 14 37.04 1 5 5.00 22 39.44

1993 2 6 55.75 7 22 33.38 10 31 51.50 9 28 28.38 4 13 31.75 32 38.83

1992 15 22 59.85 8 12 35.61 17 25 58.20 22 33 49.13 5 7 19.82 67 50.03

1991 4 3 44.12 69 44 55.84 37 24 31.91 38 24 24.30 9 6 27.89 157 40.67

1990 12 10 32.18 31 27 29.02 38 33 25.01 24 21 18.83 11 9 15.63 116 24.66

1989 9 12 82.69 16 21 53.70 21 28 19.60 30 39 23.95 76 35.97

1988 13 21 67.96 19 31 41.99 10 16 30.70 20 32 35.27 62 43.45

1987 4 13 90.68 17 55 72.02 6 19 56.24 4 13 35.25 31 66.63

1986 8 14 48.32 11 20 37.72 7 13 35.20 30 54 33.39 56 36.60

1985 2 7 74.25 3 11 34.81 7 26 36.18 15 56 41.45 27 41.78

1984 4 29 53.42 1 7 50.50 2 14 65.88 7 50 44.68 14 50.62

1983 1 13 71.00 3 38 67.72 4 50 41.79 8 55.17

1982 16 80 39.31 4 20 32.91 20 38.03

1981 1 100 72.00 1 72.00

1980 2 50 26.71 2 50 16.63 4 21.67

1979 1 100 31.00 1 31.00

1978 1 100 60.00 1 60.00

Total/Avg

.

389 15 57.82 1332 51 37.75 474 18 30.58 259 10 30.85 164 6 25.45 2,618 36.72

Median 57.42 45.64 32.73 29.69 18.25 41.77

Standard

Deva

18.21 13.35 14.17 17.46 20.37 13.89

a Standard deviations are calculated based on the yearly averages.

Sources: NYU Salomon Center from various dealer quotes.

Distressed Exchanges

Distressed exchanges usually represent a firm’s desperate attempt to avoid a formal

bankruptcy filing or a payment default on outstanding debt. They were particularly

―popular‖ in 2008 and 2009 as the successful outcome of Chapter 11 reorganizations

became very uncertain in a difficult D.I.P. and exit financing Chapter 11

environment. It is also possible, however, that a proposed distressed exchange could

represent a firm’s strategy to extract concessions from creditors when the firm has

little likelihood of failing, despite a stressed macroeconomic environment.

Distressed exchanges take several forms including a debt for debt, cash for debt,

equity for debt exchange, and various other forms that might include multiple new


18

securities in exchange for the more immediate problem security. Over the last two

years, debt for debt exchanges were popular (61 of the 197 exchanged issues), as

well as cash for debt (57) and debt + cash for debt (58). Surprisingly, only 16

involved all or partial equity exchanges, perhaps a reflection of the reluctance on the

part of creditors to accept such a minority claim when the debtor is so weak.

Distressed exchanges (DEs) in 2009 accounted for about 37.8% of the defaulted

issuers (45 out of 119), but only 18.5% of the defaulted dollar amount. From 1984

through 2009, DEs accounted for about 10.6% of all defaulting issuers and 11.9% of

all defaulted dollar amounts (Figure 16). Despite the record number of DEs in 2009,

the pace at which DEs were being sought as a restructuring alternative seems to have

slowed toward the end of the year, as there was no significant exchange offer yet to

be completed.

Figure 16 indicates the ―popular‖ re-emergence of DEs over the last 24 months

compared to the last 25 years. Indeed, during this period, approximately 51% (59 of

116) of all DEs took place, and there is no guarantee that a DE will, in fact, save the

company from a subsequent bankruptcy. As we have compiled in a recent study,

about 46% of all DEs up to 2007 resulted in a subsequent Chapter 11 or Chapter 7

bankruptcy filing and 30% of the DE firms were acquired. The data would appear to

indicate a DE is oftentimes just a short-term fix (see Altman & Karlin, 20092). Note

that we have not tracked the eventual fate of the distressed exchanges in 2008 and

2009 since those firms have not had a significant enough post-exchange period for

our statistics to be relevant.

2 The Re-emergence of Distressed Exchanges in Corporate Restructurings, E. Altman and B. Karlin, NYU Salomon Center Working

Paper, 2009 (see E. Altman’s website) and published in The Journal of Credit Risk, Summer 2009.


19

Figure 16. High Yield Bond Distressed Exchange (D/E) Default and Recovery Statistics,

1984–2009

Year

D/E

Defaults

($)

Total

Defaults ($)

D/E

Defaults

(%)

to Total

$

D/E

Defaults

(No. of

Issuers)

Total

Defaults

(No. of

Issuers)

D/E

Defaults

(%) to

Total No.

of Issuers

D/E

Recovery

Ratea

All

Default

Recovery

Ratea

Difference

Between D/E

& All

Default

Recovery

Rate

2009 22,905.90 123.823.79 18.5 45 119 37.8 42.68 36.13 6.55

2008 30,329.42 50,763.26 59.7 14 64 21.9 52.41 42.50 9.91

2007 146.83 5,473.00 2.7 1 19 5.3 85.17 66.65 18.52

2006 0.00 7,559.00 0.0 0 0 0 NA NA NA

2005 0.00 36,209.00 0.0 0 0 0 NA NA NA

2004 537.88 11,657.00 4.6 5 39 12.8 58.05 57.72 0.33

2003 1,034.94 38,451.00 2.7 7 86 8.1 78.52 45.58 32.94

2002 764.80 96,858.00 0.8 3 112 2.7 61.22 25.30 35.92

2001 1,267.60 63,609.00 2.0 5 156 3.2 33.12 25.62 7.50

2000 50.00 30,295.00 0.2 1 107 0.9 77.00 26.74 50.26

1999 2,118.40 23,532.00 9.0 6 98 6.1 65.39 27.90 37.49

1998 461.10 7,464.00 6.2 2 37 5.4 17.34 40.46 (23.12)

1997 0.00 4,200.00 0.0 0 0 0.0 NA NA NA

1996 0.00 3,336.00 0.0 0 0 0.0 NA NA NA

1995 0.00 4,551.00 0.0 0 0 0.0 NA NA NA

1994 0.00 3,418.00 0.0 0 0 0.0 NA NA NA

1993 0.00 2,287.00 0.0 0 0 0.0 NA NA NA

1992 0.00 5,545.00 0.0 0 0 0.0 NA NA NA

1991 76.00 18,862.00 0.4 1 62 1.6 31.30 40.67 (9.37)

1990 1,044.00 18,354.00 5.7 7 47 14.9 43.15 24.66 18.49

1989 548.90 8,110.00 6.8 7 26 26.9 44.53 35.97 8.56

1988 390.30 3,944.00 9.9 3 24 12.5 28.40 43.45 (15.05)

1987 33.60 7,486.00 0.4 2 15 13.3 40.70 66.63 (25.93)

1986 114.80 3,156.00 3.6 4 23 17.4 47.68 36.60 11.08

1985 323.30 992.00 32.6 2 19 10.5 55.04 41.78 13.26

1984 100.10 344.00 29.1 1 12 8.3 44.12 50.62 (6.50)

Totals/Averages $69,154.04 $580,279.05 11.9% 116 1099 10.6% 51.81b 42.00b 9.82

a Weighted-average recovery rates for each year.

b Arithmetic average of the weighted-average annual recovery rates;

only those years with DEs counted. The arithmetic average of each individual DE (116) for the entire sample period

was 48.24% and the average for the non-DE defaults (983 observations) was 36.72%.


Recovery Rates on Distressed Exchanges

Because DEs are not as dramatic a reflection of a firm’s distressed status as a

bankruptcy or nonpayment of cash interest on debt, one might expect the

recovery rate on DE defaults to be higher than other, more serious distressed

situations. Of course, one reason for the larger recoveries in DEs is lenders need

to be offered a ―premium‖ in order to be persuaded to participate in the

exchange.

Figure 16 shows the arithmetic average recovery rate on all DE defaults was 51.8%

for 1984–2009, compared to 42.0% for all defaults, and 36.7% for all non-DE

defaults. In 2008, DEs recovered 52.2%, while non-DE defaults recovered only

27.1%. As the 2009 recovery rate on DEs equaled 42.7% versus 36.1% on all

defaults, the spread has widened significantly since earlier this year, particularly the

first quarter, when the recovery on all defaults was higher than on DEs.

In Figure 17, we calculate a difference in means test between the arithmetic average

recovery rate (48.2%) on the 116 DE issuers (269 issues) during 1984–2009 and the

average recovery rate on all non-DE defaults (36.7%) of the same period. We found

that given the above, the DE recovery rate is significantly higher (t = 7.49) at the 1%

confidence level. It is not surprising that bondholders will choose, in many instances,

to accept a recovery with certainty from a DE, rather than take the chance of holding


20

out for an uncertain — and likely lower — recovery in bankruptcy (see below). Our

results do not include data for situations where a DE offer is rejected.

Figure 17. Difference in Means Test Between Recovery Rates: All

Nondistressed Exchange Defaults Versus Distressed Exchanges (D/E),

1984–2009

All Defaults Excluding D/E

(Issues)

Distressed Exchange

(Issues)

Sample Size 2239 269

Mean Recovery Rate 36.72 48.24

Standard Deviation 25.95 23.59

Variance 673.63 556.27

t-testa 7.48755

a

Sources: NYU Salomon Center, and authors’ compilation.

In Figure 18, we calculate a difference in means test between the weighted average

recovery rate on the announcement date of a DE versus the completion date for both

2008 and 2009. Of the 42 defaulted issues in 2008 due to a DE, in which prices were

available for both the announcement and completion dates, the weighted average

recovery was approximately 13 percentage points higher on the completion date.

Though completion date recoveries also proved to be higher in 2009, they were much

less so, with only a 4.9% difference in pricing between the two dates. So, the prices

of the distressed exchange bonds were significantly higher at the completion of the

exchange than when it was first announced based on the 2008 sample, but the

difference was much less significant in the 2009 cohort. Overall, the completion date

price was higher than the announcement date in 79 of the 148 issues, just over 50%

(53.4%) of the cases.

Figure 18. Distressed Exchange Weighted Average Recovery Rates:

Announcement Date versus Completion Date, 2008–2009

Year

# of

Observations Announcement Date

Completion

Date Difference t-test

2008 42 42.68 55.64 (12.97) 2.69469a

2009 106 36.51 41.41 (4.91) 1.44079b

a Significant at the .01 level. b Significant at the .10 level.



21

Liquidation Recoveries

As we, (Altman & Karlin (2009)3), and others have discussed, the recent credit crisis

has heightened the risk that a Chapter 11 filing could result in a failed reorganization,

ultimately culminating in a liquidation of assets and subsequent payment of proceeds

to creditors. As noted earlier, the reduced availability of either debtor-in-possession

(D.I.P.) or exit financing makes a successful reorganization less likely. Even under

more normal conditions, firms may have little or no prospect of generating sufficient

cash flows to cover even a reduced debt burden and, in essence, the liquidation value

of the enterprise is deemed greater than the going-concern value. Given these

prospects, a key question for major stakeholders, particularly creditors, is the likely

recovery given liquidation, and how that value compares with the debt price just after

the filing of the initial Chapter 11. These are the questions we will now examine.

Liquidating Chapter 7’s versus Chapter 11’s4

Liquidations after an initial Chapter 11 filing can take two main forms – either a

conversion to Chapter 7 or a liquidating Chapter 11. The primary differences

between these two forms may affect the expected recovery for creditors from the

estate based on the revenues, timing, costs, and the administration of the liquidation

process. The liquidating Chapter 11 is more popular with some debtors because the

business continues with the incumbent board and management remaining as the

―debtor-in-possession‖ to manage the liquidation, as opposed to the court appointed

Trustee in a Chapter 7. The latter has the task of liquidating the estate as

expeditiously as possible, with limited powers to operate the business.

To illustrate some differences, in a Chapter 11 case, commercial real property leases

may be assumed or rejected up to 210 days (120 days with a possible 90 day

extension) after the initial filing, while in a Chapter 7 they must be assumed or

rejected within 60 days. Thus, a Chapter 7 Trustee is more likely to expedite a sale

process and not explore alternative options to maximize value. The Trustee is usually

paid a percentage (not to exceed 3%) of the total amount dispersed. As such, creditor

distributions will be reduced by the fee, although the proceeds are likely to come

earlier than in a liquidating Chapter 11.

On the other hand, since a committee of unsecured creditors is usually not appointed

in a Chapter 7, this process is not burdened by the delay of having all decisions

reviewed by the committee as well as the need to negotiate with the unsecured

creditors to garner their votes for liquidation without the threat of objections and

lawsuits – not to mention the likely cost of these objections and delays usually borne

by the estate. Another potentially significant cost of the Chapter 11 process is the

professional fees incurred by all constituencies in drafting and reviewing the plan

and disclosure statement, as well as for hearings and objections. A further expense of

the Chapter 11 process is the payment in full, in cash, of any administrative and

priority claims before any funds are distributed to creditors.

3E. Altman and B. Karlin (2009), ―Defaults and Returns in the High Yield Bond Market: The Year 2008 in Review and Outlook‖,

NYU Salomon Center Special Report, February.

4 Thanks to Daniel Kamensky of Paulson & Co. for his helpful comments on the differences between these two processes.


22

In essence, the creditors need to weigh the benefits of greater control of the process

under the Chapter 11 liquidation versus the additional time and expenses. Many

creditors, however, are not experienced enough to do this tradeoff analysis. While a

proceeding under Chapter 11 may involve more costs and delays, limited power to

consider alternatives in a Chapter 7 will oftentimes swing the decision in favor of the

Chapter 11 liquidation, thereby making it more popular, especially when creditors

are more sophisticated and more is at stake.

Indeed, our research shows that over the 20-year period 1990-2009, 92 relatively

large companies with publicly held bonds outstanding liquidated under Chapter 11,

while just 28 companies converted first to a Chapter 7 and then liquidated (about a

3.3:1 ratio). If we expand our sample to include all Chapter 11 filings, regardless if

publicly held bonds were outstanding, the number of Chapter 11 liquidations

increases to 351 vs. 298 Chapter 7 conversions (a 1.2:1 ratio) over the same 20-year

period.5 So, it appears that larger firms with more complex capital structures prefer

the Liquidating Chapter 11 alternative more frequently than do all debtors in

bankruptcy. Figure 19 shows the frequency of Chapter 11 liquidations and Chapter 7

conversions, by year, over the period 1990-2009, with a further distinction being

whether or not the firms had publicly traded bonds outstanding.

Figure 19. Chapter 11 Liquidations versus Chapter 7 Conversions, By

Year and Whether Publicly Owned Bonds Were Outstanding (Number of

Firms), 1990–2009

Year

All Chapter 11

Liquidations

All Chapter 7

Conversions

Chapter 11

Liquidations

w/Bonds Outstanding

Chapter 7

Conversions w/Bonds

Outstanding

2009 20 22 5 2

2008 22 18 3 3

2007 17 9 5 0

2006 19 16 4 2

2005 25 13 7 1

2004 49 12 11 1

2003 66 27 14 4

2002 34 42 9 5

2001 17 33 7 5

2000 25 19 10 4

1999 11 16 2 1

1998 5 12 1 0

1997 4 10 1 0

1996 9 6 3 0

1995 3 9 1 0

1994 9 5 4 0

1993 6 9 1 0

1992 7 8 2 0

1991 1 8 1 0

1990 2 4 1 0

Total 351 298 92 28

Sources: New Generation Research (Boston) and NYU Salomon Center Default Database.

Recoveries

Several key questions are critical for existing creditors and potential distressed debt

investors when a company defaults and files for the right to reorganize under Chapter

5 Thanks to New Generation Research, Boston, MA, for the relevant data accumulations. Data in the first ten years in our time series

(1990-1999) are less certain, especially the Chapter 7 conversions.


23

11. First, and foremost, is whether or not the price of debt securities will increase

during and after the reorganization. Key to that conclusion is the likelihood that the

firm will emerge from bankruptcy as a going concern, and whether the old debt

securities will be exchanged for valuable new debt, equity claims, cash, or a

combination of the aforementioned. Most studies, including Altman and Eberhart

(1994)6 and Keisman (2004)

7, have shown that the average rate of return between the

initial default and the subsequent price at the time of emergence from the

reorganization results in an annualized return between low single digits and 20%-

30%, depending upon the seniority and the sample period. Generally, senior debt

securities do best with significant positive annual returns of 20-30%.

If the company is not able to successfully reorganize, positive returns in the post-

bankruptcy period are less likely since values will no longer be based on a going-

concern concept. Regardless of the outcome, distressed investors usually assume a

―floor‖ value given a downside scenario, and, certainly, liquidation qualifies as an

extremely negative scenario. Also worth noting is the opportunity cost of lost

potential returns given the sale of the securities at default and investment of the

proceeds in alternative securities instead of holding onto the debt. For example,

Altman and Eberhart assumed that the appropriate ―opportunity cost‖ was the return

on an investment in a portfolio of high-yield, junk-bond securities.

We have analyzed a sample of bonds from companies that filed for reorganization

under Chapter 11 and eventually liquidated under a Chapter 7 conversion or a

liquidating Chapter 11. The number of Chapter 7 conversions or Chapter 11

liquidations over the 20-year period 1990-2009 for firms with publicly held bonds

outstanding, for which we had prices at the time of filing, is 87, with 141 individual

issues. Of these, we were able to trace the price of the bonds just prior to liquidation

on 72 of these issues (42 firms, see Figure 20). The average price of the 72 issues at

the time of the initial filing was $20.18 of par value, compared to an average price of

just $13.22 upon liquidation. The difference of just less than seven percentage points

is extremely significant (t-test = 7.1). The average price of the 141 issues upon filing

is essentially the same ($20.65) as the smaller sample of 72 ($20.18) that we were

able to find prices for both at the time of filing and at liquidation. Of the 72

securities, all but 12 (six firms) had a lower price at liquidation than at the time of the

initial filing.

The negative performance of liquidating companies is far more clear for those firms

that converted to a Chapter 7 than those liquidating under a Chapter 11, and the

security prices of the Chapter 7 firms were also considerably lower at the time of the

initial filing. This implies that those firms that eventually liquidate under a Chapter 7

conversion are in far worse shape with fewer reorganization prospects than those

who eventually do liquidate, but under a Chapter 11 process. For example, the

average price of the 15 bonds of Chapter 7 companies at the time of filing is $8.19

compared to just $1.91 upon conversion to Chapter 7 (t = 2.94). The comparable

statistics for the 57 Chapter 11 liquidations were $23.93 and $16.76, respectively.

6 E. Altman and A. Eberhart (1994), ―Do Seniority Provisions Protect Bondholders’ Investments?‖, Journal of Portfolio

Management, Summer.

7 D. Keisman (2004), ―Ultimate Recovery Rates on Bank Loan and Bond Defaults‖, Loss Stats, S&P (NY).


24

While the difference in means prices ($7.17) of the latter is not trivial, the mean

difference is barely significant at the 10% level.

Finally, it is clear that the market understood that those companies that eventually

liquidated were in significantly poorer condition than the average company that

defaults. Indeed, the average price of corporate bonds at the time of default,

approximately $36.78, is significantly higher than the average price ($20.65) of our

141-issue sample that eventually resulted in liquidation. Still, not surprisingly,

despite this relatively low price at filing, the portfolio of liquidating issuers did

poorly between the filing and liquidation dates, indicating that the market

overestimated the prices at the time of filing. This would most likely be due to the

perceived upside potential if the firm eventually overcomes its adversity and either

emerges from the reorganization as a going concern or is sold in a 363 sale or total

enterprise transaction.9

Figure 20. Recovery Rates (Wgt. Prices) on Bonds of Companies That

Filed a Chapter 11 Petition and Later Converted to a Chapter 7 or a

Liquidating Chapter 11, 1990–2009

No. of Bonds

Wgt. Avg. Price at

Filing (F) Chapter 11

Wgt. Avg. Price at

Liquidation (L) t-test

All Liquidations

(Std. Deviation)

72 $20.18

(17.69)

$13.22

(28.83)

1.75c

Chapter 11 Liquidations

(Std. Deviation)

57 $23.93

(19.49)

$16.76

(30.90)

1.48c

Chapter 7

Conversion/Liquidations

(Std. Deviation)

15

$8.19

(7.40)

$1.91

(3.69)

2.94b

a

b Significant at the .01 level. c Significant at the .10 level.

Source: Author Compilation from data supplied from New Generation Research (Boston) and the NYU Salomon Center (NY) Default

Database.

Forecast Recovery Versus Actual

The 2009 weighted-average recovery rate of 36.1% was above our linear or non-

linear regression default/recovery rate forecasting models’ predictions (Figure 21).10

We would have expected the average recovery rate to be closer to the 26%-29%

range, based upon the model used. As noted earlier, the weighted-average recovery

rate was impacted positively (i.e. considerably higher recoveries) by the CIT and

Charter Communications filings.

8 Based on over 2,600 defaulted bond observations for the period 1978-2009 (Figure 15, earlier).

9 We have not assessed the ultimate value of the bonds given a 363 or total enterprise sale.

10 ―The Link Between Default and Recovery Rates: Theory, Empirical Results and Implications,‖ Altman, Brady, Resti and Sironi,

Journal of Business, November 2005.

XF XL

t =

+

t =

√ Var XF Var XL

NF NL


25

Figure 21. Recovery Rate/Default Rate Association, Dollar Weighted

Average Recovery Rates to Dollar Weighted Average Default Rates,

1982–2009

2005

2004

2003

20022001

20001999

1998

19971996

19951994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

20062007

2008

2009

y = -2.3137x + 0.5029

R2 = 0.5361

y = -0.1069Ln(x) + 0.0297

R2 = 0.6287

y = 30.255x2 - 6.0594x + 0.5671

R2 = 0.6151

y = 0.1457x-0.2801

R2 = 0.6531

10%

20%

30%

40%

50%

60%

70%

0% 2% 4% 6% 8% 10% 12% 14%

Rec

ove

ry R

ate

Recovery Rate/Default Rate AssociationDollar Weighted Average Recovery Rates to Dollar Weighted Average Default Rates

(1982-2009)

Regression equations are based on data from 1982–2003, with later years data points

inserted to show the model’s effectiveness.

Sources: “The Link Between Default and Recovery Rates: Theory, Empirical Results and

Implications,” Altman, Brady, Resti, and Sironi, Journal of Business, November 2005, and

NYU Salomon Center.

Related Recovery Statistics

The recovery rate (based on price just after default) on corporate high-yield bond

defaults has a fairly high variance in terms of the wide spectrum of possible outcomes,

with a standard deviation of about 25%. Figure 22 shows the frequency distribution of

individual issue recovery rates on over 2,500 corporate bond defaults of all seniorities

since 1971. Note that the modal value is only in the 10–20% range, even though our

historical average recovery rate range is 35–40%.

Figure 22. Corporate Bond Default Recovery Rate Frequency (Based on

Number of Issues 1971–2009)

0

100

200

300

400

500

600

0-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 >100

Recovery Rate Range (%)

Freq

uenc

y

Number of Observations = 2,547.

Source: NYU Salomon Center Default Database.


26

Figure 23 shows the average price at default based on the number of years after

issuance. Although we observe some aging effect with the recovery rate increasing as

the years to default increases, there is not a great deal of difference between the first

and fifth years (32–38%) or between the sixth through ninth years (40–42%). The latter

period is more likely to comprise fallen angel defaults than the former. We note years

seven through nine showed a decrease in recoveries in 2009, compared to 2008,

returning to more normal values.

Figure 23. Average Price at Default by Number of Years After

Issuance (1971–2009)

Years to Default No. of Observations Average Price ($)

1 179 33.44

2 381 34.11

3 472 32.39

4 386 37.68

5 304 37.83

6 261 42.40

7 164 41.79

8 96 42.07

9 63 40.15

10 198 35.06

All 2,504 36.64


Figure 24 shows the recovery rate by original rating for the entire corporate bond

default database over the last 39 years. As expected, the higher the original rating,

the greater the average recovery rate, but only in the investment-grade original rating

range — that is, among fallen angels. Once below BBB, the weighted-average

recovery rate varies narrowly, 34–38%. However, we observe the median recovery

rates follow a continuous drop, as the original rating falls, except between the B and

CCC original ratings (both 29%).

Figure 24. Average Price after Default by Original Bond Rating,

1971-2009

Rating

No. of

Observatio

ns

Average

Price ($)

Weighted

Price ($)

Median

Price ($)

Std.

Dev. ($)

Minimum

Price ($)

Maximum

Price ($)

AAA 14 82.55 92.87 95.00 21.92 32.00 106.13

AA 30 65.68 76.84 60.00 26.69 17.80 103.00

A 247 48.45 46.13 44.88 27.36 2.00 100.00

BBB 470 40.16 33.32 39.00 23.89 1.00 103.00

BB 272 38.51 34.71 36.00 23.49 1.00 107.75

B 1294 34.27 32.92 29.00 24.82 0.02 112.00

CCC 298 37.27 35.68 29.00 29.00 0.13 106.75

Total 2625 38.12 36.06 33.00 26.02 0.02 112.00


Earlier we showed that seniority makes a large difference in expected recoveries. It is

true that the likelihood is greater that an investment-grade bond at issuance will have

senior priority (secured or unsecured) than one would expect from noninvestment-

grade original issue bonds. Figure 25 shows the recovery rate by seniority,

contingent upon if the original issue was rated investment grade.


27

Figure 25. Recovery Rates by Seniority and Original Rating, Corporate Bond Defaults (By

Issue, 1971–2009)

Seniority Original Rating

No. of

Issues

Mean Price

($)

Weighted

Price ($)

Median Price

($) STD

Minimum

Price ($)

Maximum

Price ($)

Senior Secured

Investment Grade

145 53.21 57.23 50.50 27.02 3.00 106.13

Non-Investment Grade

270 43.83 44.29 39.00 29.19 1.00 106.75

All 460 46.64 46.99 43.50 28.39 0.05 106.75

Senior Unsecured

Investment Grade

482 43.69 40.28 42.25 25.29 2.00 100.50


650 36.18 33.10 31.15 24.25 0.02 100.00

All 1243 39.95 36.70 35.00 24.99 0.02 100.50

Senior Subordinated

Investment Grade

16 37.10 34.29 27.31 27.48 1.00 83.75


432 32.74 29.32 27.37 24.31 0.13 107.75

All 476 32.14 29.30 27.00 24.30 0.13 107.75

Subordinated Investment Grade

21 22.52 6.43 10.00 27.59 2.00 103.00


204 32.54 29.64 28.92 22.68 1.00 112.00

All 238 31.45 21.97 28.42 23.05 1.00 112.00

Discount Investment Grade

1 13.63 13.63 13.63 13.63


103 27.48 26.29 17.31 25.16 0.42 102.50

All 130 26.84 26.31 18.00 23.51 0.42 102.50


From Figure 25, we see considerably higher recoveries between investment-grade

and noninvestment-grade bonds for senior secured (53.2% versus 43.8%) and senior

unsecured (43.7% versus 36.2%), less of a difference for the senior subordinated

class (37.1% versus 32.2%), and the reverse for the subordinated class. Likewise, as

seniority is reduced, we see a reduction in recoveries for the investment-grade issues,

but not much difference for the noninvestment-grade securities.

Finally, in Figure 26, we break down recoveries by seniority for different major

industrial sectors. The sectors are the same as itemized earlier when we observed the

incidence of defaults per industrial sectors (Figures 8 and 9). The overall weighted-

average recovery rates are highest for energy (51.9%), utilities (51.8%), and financial

services (47.6%), and lowest for general manufacturinge (29.9%), communications

(28.0%), and auto/motor carrier (25.7%). The rest vary between 32–45%.


28

Figure 26. Recovery Rates by Industry and Seniority (1971–2009)

Industry Seniority

No. of

Issues

Mean Price

($)

Weighted

Price ($)

Median

Price ($) STD

Minimum Price

($)

Maximum

Price ($)

Auto/Motor Carrier Senior Secured 16 30.78 24.96 24.00 24.46 2.71 92.00

Senior Unsecured 74 30.09 26.37 23.91 22.86 4.00 93.60

Senior Sub 20 27.26 21.77 23.50 19.93 3.00 71.00

Subordinated 4 34.28 25.71 27.00 21.25 18.00 65.13

Senior Sub +Sub 24 28.43 22.21 25.00 19.85 3.00 71.00

All 114 29.84 25.75 25.00 22.31 2.71 93.60

Conglomerates Senior Unsecured 3 44.92 47.94 53.38 14.65 28.00 53.38

Senior Sub 1 71.00 71.00 71.00 71.00

Subordinated 2 11.50 15.19 11.50 9.19 5.00 18.00

Senior Sub +Sub 3 31.33 22.52 18.00 34.96 5.00 71.00

All 6 38.13 40.93 40.69 25.10 5.00 71.00

Energy Senior Secured 37 63.25 65.24 64.00 32.44 2.00 104.50


Senior Sub 28 38.15 46.60 34.88 23.97 1.00 107.75

Subordinated 26 25.38 25.39 21.13 12.19 9.50 55.00

Discount 1 45.26 45.26 45.26 45.26

Senior Sub +Sub 54 32.00 42.22 27.50 20.11 1.00 107.75

All 178 44.73 51.86 38.94 26.20 1.00 107.75

Financial Services Senior Secured 16 34.44 27.34 23.94 24.31 14.00 94.00


Senior

Subordinated

20 31.97 28.85 28.00 24.07 1.00 92.00

Subordinated 28 22.43 9.11 6.00 26.78 1.00 103.00

Senior Sub +Sub 48 26.41 13.05 23.00 25.86 1.00 103.00

All 220 43.63 47.65 39.25 29.14 0.02 103.00

Leisure & Senior Secured 37 50.69 55.86 52.50 25.98 0.05 106.00

Entertainment Senior Unsecured 44 37.66 30.66 27.86 26.79 3.75 100.00

Senior Sub 40 31.07 27.75 23.00 25.34 3.00 99.00

Subordinated 21 46.17 55.78 36.50 29.79 7.00 112.00

Discount 2 18.88 20.74 18.88 9.73 12.00 25.76

Senior Sub +Sub 61 36.27 33.60 29.00 27.67 3.00 112.00

All 144 40.16 38.02 35.00 27.40 0.05 112.00

General Mfg Senior Secured 78 40.75 41.26 39.22 25.64 1.75 106.75


Senior Sub 142 31.69 29.04 27.75 23.84 0.75 106.00

Subordinated 65 34.95 27.99 32.00 21.15 2.00 90.88

Discount 12 17.90 27.17 8.72 23.25 0.75 66.50

Senior Sub +Sub 207 32.71 28.76 29.00 23.03 0.75 106.00

All 497 33.89 29.87 29.50 23.27 0.25 106.75

Healthcare Senior Secured 2 91.25 97.38 91.25 10.25 84.00 98.50


Senior Sub 33 24.50 21.06 15.50 23.11 0.13 86.00

Subordinated 10 23.77 17.57 23.50 13.41 4.75 39.00

Discount 2 21.05 27.07 21.05 18.32 8.09 34.00

Senior Sub +Sub 43 24.33 20.50 18.00 21.11 0.13 86.00

All 59 31.08 31.72 29.00 24.27 0.13 98.50

Misc. Industries Senior Secured 31 44.24 46.49 43.50 27.26 5.00 93.50


Senior Sub 33 35.16 36.40 27.81 26.28 1.00 96.00

Subordinated 8 38.67 17.59 34.07 23.53 4.00 88.00

Discount 5 4.37 4.27 4.03 2.79 0.75 8.00

Senior Sub +Sub 41 35.85 35.12 29.63 25.52 1.00 96.00

All 136 43.58 45.95 40.00 27.46 0.75 99.00

Real Estate Senior Secured 6 50.58 52.55 58.75 34.50 3.00 82.50

& Construction Senior Unsecured 56 47.05 39.70 44.25 22.15 6.00 100.50

Senior Sub 29 25.43 18.22 15.50 25.74 2.00 95.50

Subordinated 11 35.98 25.21 21.88 33.65 2.00 98.25

Discount 3 13.61 20.97 13.63 12.40 1.21 26.00

Senior Sub +Sub 40 28.33 19.37 17.69 28.08 2.00 98.25

All 105 39.16 32.00 32.25 26.84 1.21 100.50


29

Figure 26. Recovery Rates by Industry and Seniority (1971–2009) (Continued)

Industry Seniority

No. of

Issues

Mean Price

($)

Weighted

Price ($)

Median

Price ($) STD

Minimum Price

($)

Maximum

Price ($)

Retailing Senior Secured 28 45.17 38.80 43.50 24.74 2.50 90.00


Senior Sub 74 31.89 28.83 25.25 22.68 0.50 94.00

Subordinated 36 27.27 25.44 20.00 18.96 3.38 70.00

Discount 3 35.85 35.51 20.00 33.26 13.48 74.06

Senior Sub +Sub 110 30.38 28.11 23.00 21.55 0.50 94.00

All 295 39.57 36.24 40.00 22.44 0.23 98.50

Communications Senior Secured 61 37.53 36.70 32.00 31.83 1.00 99.00

& Media Senior Unsecured 299 30.43 26.12 24.00 22.74 1.00 95.75

Senior Sub 48 38.05 33.40 34.00 26.16 0.13 97.00

Subordinated 17 32.00 37.86 20.00 25.84 6.50 89.00

Discount 101 28.82 26.59 20.00 23.55 0.42 102.50

Senior Sub +Sub 65 36.47 33.77 30.00 26.01 0.13 97.00

All 526 31.69 28.05 24.00 24.63 0.13 102.50

Transport (Non-

auto)

Senior Secured 121 50.23 60.59 44.00 26.49 2.00 106.13


Senior Sub 6 41.71 25.24 36.75 25.99 13.00 83.75

Subordinated 8 29.89 20.50 26.06 21.63 10.00 65.50

Senior Sub +Sub 14 34.96 22.14 33.63 23.42 10.00 83.75

All 208 41.89 44.74 34.25 25.82 2.00 106.13

Utilities Senior Secured 27 56.57 39.27 56.25 24.69 2.00 99.88


Senior Sub 2 43.88 52.92 43.88 36.95 17.75 70.00

Subordinated 2 44.00 44.00 44.00 0.00 44.00 44.00

Discount 1 68.00 68.00 68.00 68.00

Senior Sub +Sub 4 43.94 51.51 44.00 21.33 17.75 70.00

All 59 65.87 51.83 77.00 24.36 2.00 99.88


Mortality Rates and Losses

A method we developed in 1989, and updated annually since, to assess the

probability of default of newly issued corporate bonds and also to forecast default

rates (see below) is the mortality rate approach. This default measurement includes

the impact of bond aging by adjusting the base population over time for such

disappearances as defaults, calls, and other noncredit-related events. Results are

calculated based on the rating at birth and the volume of issuance. Similar statistics

for cumulative default rates can be found from rating agency compilations, only the

base is usually the number of issuers. These agency-calculated cumulative default

rates are based on the number of issuers in a certain rating category at the beginning

of the same year, regardless of the rating received when they were issued. Hence,

they are not affected by aging, and the statistics are more appropriate for seasoned

portfolios.


30

Figure 27. Mortality Rates by Original Rating — All Rated Corporate Bondsa (1971–2009)

Years After Issuance

1 2 3 4 5 6 7 8 9 10

AAA Marginal 0.00% 0.00% 0.00% 0.00% 0.03% 0.02% 0.01% 0.00% 0.00% 0.00%

Cumulative 0.00% 0.00% 0.00% 0.00% 0.03% 0.05% 0.06% 0.06% 0.06% 0.06%

AA Marginal 0.00% 0.00% 0.27% 0.12% 0.02% 0.01% 0.00% 0.01% 0.03% 0.01%

Cumulative 0.00% 0.00% 0.27% 0.39% 0.41% 0.42% 0.42% 0.43% 0.46% 0.47%

A Marginal 0.01% 0.08% 0.18% 0.19% 0.15% 0.12% 0.05% 0.22% 0.12% 0.08%

Cumulative 0.01% 0.09% 0.27% 0.46% 0.61% 0.73% 0.78% 1.00% 1.11% 1.19%

BBB Marginal 0.42% 2.86% 1.48% 1.12% 0.68% 0.30% 0.36% 0.19% 0.18% 0.38%

Cumulative 0.42% 3.27% 4.70% 5.77% 6.41% 6.69% 7.02% 7.20% 7.37% 7.72%

BB Marginal 1.09% 2.23% 4.11% 2.18% 2.58% 1.50% 1.57% 1.20% 1.63% 3.30%

Cumulative 1.09% 3.30% 7.27% 9.29% 11.63% 12.96% 14.32% 15.35% 16.73% 19.48%

B Marginal 3.08% 8.05% 8.08% 8.18% 6.11% 4.78% 3.85% 2.35% 1.94% 0.96%

Cumulative 3.08% 10.88% 18.08% 24.78% 29.38% 32.76% 35.34% 36.86% 38.09% 38.68%

CCC Marginal 8.78% 13.02% 18.68% 16.34% 4.64% 12.15% 5.65% 5.11% 0.77% 4.59%

Cumulative 8.78% 20.66% 35.48% 46.02% 48.53% 54.78% 57.33% 59.51% 59.83% 61.67%

a Rated by S&P at issuance based on 2,527 issues.

Sources: S&P and NYU Salomon Center.

Figure 28. Mortality Losses by Original Rating — All Rated Corporate Bondsa (1971–2009)

Years After Issuance

1 2 3 4 5 6 7 8 9 10

AAA Marginal 0.00% 0.00% 0.00% 0.00% 0.01% 0.01% 0.01% 0.00% 0.00% 0.00%

Cumulative 0.00% 0.00% 0.00% 0.00% 0.01% 0.02% 0.03% 0.03% 0.03% 0.03%

AA Marginal 0.00% 0.00% 0.04% 0.04% 0.01% 0.01% 0.00% 0.01% 0.01% 0.01%

Cumulative 0.00% 0.00% 0.04% 0.08% 0.09% 0.10% 0.10% 0.11% 0.12% 0.13%

A Marginal 0.00% 0.03% 0.09% 0.15% 0.09% 0.05% 0.03% 0.05% 0.08% 0.03%

Cumulative 0.00% 0.03% 0.12% 0.27% 0.36% 0.41% 0.44% 0.49% 0.57% 0.60%

BBB Marginal 0.33% 1.92% 1.26% 0.45% 0.44% 0.20% 0.15% 0.11% 0.11% 0.22%

Cumulative 0.33% 2.24% 3.48% 3.91% 4.33% 4.52% 4.67% 4.77% 4.88% 5.09%

BB Marginal 0.63% 1.29% 2.43% 1.27% 1.54% 0.79% 0.86% 0.52% 0.84% 1.18%

Cumulative 0.63% 1.91% 4.30% 5.51% 6.97% 7.70% 8.49% 8.97% 9.74% 10.80%

B Marginal 2.06% 5.63% 5.48% 5.46% 4.03% 2.63% 2.50% 1.32% 1.00% 0.69%

Cumulative 2.06% 7.57% 12.64% 17.41% 20.74% 22.82% 24.75% 25.74% 26.49% 26.99%

CCC Marginal 5.78% 9.34% 13.28% 11.95% 3.28% 9.15% 4.26% 3.96% 0.47% 2.94%

Cumulative 5.78% 14.58% 25.92% 34.78% 36.92% 42.69% 45.13% 47.30% 47.55% 49.09%

a Rated by S&P at issuance based on 2,099 issues.

Sources: S&P and NYU Salomon Center Default Database.

Updated mortality statistics are reported in Figures 27 and 28. Since the 2009 default

rate was the second largest in our time series from 1971–2009, the updated mortality

rate statistics tend to be slightly higher than one year earlier, particularly for issuance

that was originally rated single-A or single-B. For example, the three- and four-year B-

rated category had cumulative mortality rates of 18.08% and 24.78% in 2009

compared to 15.89% and 22.97% in 2008, and the single-A cumulative rate jumped to

61bp (0.61%) for five years from 21bp (0.21%) one year ago. We utilize our mortality

rate statistics in one of our default forecasts at the end of this report.

Mortality losses in Figure 28 indicate a parallel story to the mortality rate statistics.

Most losses are quite similar to — or higher than — the end of 2008, due to the

lower recoveries in 2009, as well as higher defaults.

Returns and Spreads

Figure 29 shows the return on high-yield bonds for 2009 was 55.19%, the highest

annual return ever. The excess return versus 10-yr US Treasury bonds was 65.11%, a

clear reversal of 2008, when the excess return (loss) was –46.21%. Although the


31

average excess return spread dropped to just 65bp at the end of 2008, 2009’s

performance has enabled the average to increase to 2.66%, a more normally expected

excess return.

The spread between the yield-to-maturity on high-yield bonds versus 10-yr

Treasuries decreased by 158bp from 671bp at the end of the third quarter to a year-

end total of 513bp, the lowest in over two years. Figure 30 shows the spread trend

from its all-time low of 260bp in June 2007, to the peak spread of 2,046bp in

December 2008, then its steady decline for the following four quarters, through the

end of 2009.

Due to the exceptionally high absolute and relative returns in 2009, the arithmetic and

geometric average annual return spread versus 10-yr US Treasuries for 1978–2009

increased to 2.66% and 2.22%, respectively, compared to 0.65% and 0.38% one year

earlier (Figure 29). Mentioned as a consideration in last year’s report11

, the low

cumulative historic relative return at the end of 2008 proved to be an excellent

indicator (along with the unprecedented high-yield spread) of the opportunity for

future large returns.

Defaulted Debt Returns

In a subsequent report (to be published shortly), we will analyze the recent risk and

return performance of the distressed debt markets, especially for those investors who

concentrate on defaulted bonds and bank loans. As we will discuss later in this

report, as well as in our subsequent one, distressed markets can include those debt

securities that are trading at large discounts from par value but are still current on

their interest payments as well as those that have already defaulted but still trade.

In 2009, the Defaulted bond and loan securities and private debt facilities realized

record high annual returns. The Altman-NYU Salomon Center Index of Defaulted

Bonds surged in 2009 by a record-high 96.42%, and the Index of Defaulted Loans

also achieved its best year ever, increasing by 32.80%12

. The Combined Index of

Defaulted Bonds and Bank Loans was up by 55.99%, also, of course, a record year.

Other defaulted/bankrupt bond indexes also had record years, including Moody’s

bankrupt bond index return of 269% and Credit Suisse’s defaulted bond index, up

187%, both also astounding increases.

As for distressed debt, hedge-fund indexes, 2009 was also an impressive year,

although not nearly as much as the long-only, 100% invested defaulted debt indexes

reported above. These indexes reflect actual performance averages of samples of

hedge funds. Results were Hennessee’s (42.97%), HFR’s (29.24%), and

Credit Suisse/Tremont’s (20.59%).

11 Altman & Karlin ―Defaults and Returns in the High Yield Market: The Year 2008 in Review and Outlook‖, NYU Salomon Center

Special Report, February 2009.

12 The NYU Salomon Center maintains three defaulted debt indexes and reports these performance statistics on a monthly total return

basis. For more information, call (212) 998-0701.


32

Figure 29. Annual Returns, Yields, and Spreads on 10-Yr Treasury and

High-Yield Bonds,a 1978–2009

Return (%) Yield to Maturity (%)

Year

High

Yield Treasury

Excess

Returns

High

Yield Treasury Spread

2009 55.19 (9.92) 65.11 8.97 3.84 5.13

2008 (25.91) 20.30 (46.21) 19.53 2.22 17.31

2007 1.83 9.77 (7.95) 9.69 4.03 5.66

2006 11.85 1.37 10.47 7.82 4.70 3.11

2005 2.08 2.04 0.04 8.44 4.39 4.05

2004 10.79 4.87 5.92 7.35 4.21 3.14

2003 30.62 1.25 29.37 8.00 4.26 3.74

2002 (1.53) 14.66 (16.19) 12.38 3.82 8.56

2001 5.44 4.01 1.43 12.31 5.04 7.27

2000 (5.68) 14.45 (20.13) 14.56 5.12 9.44

1999 1.73 (8.41) 10.14 11.41 6.44 4.97

1998 4.04 12.77 (8.73) 10.04 4.65 5.39

1997 14.27 11.16 3.11 9.20 5.75 3.45

1996 11.24 0.04 11.20 9.58 6.42 3.16

1995 22.40 23.58 (1.18) 9.76 5.58 4.18

1994 (2.55) (8.29) 5.74 11.50 7.83 3.67

1993 18.33 12.08 6.25 9.08 5.80 3.28

1992 18.29 6.50 11.79 10.44 6.69 3.75

1991 43.23 17.18 26.05 12.56 6.70 5.86

1990 (8.46) 6.88 (15.34) 18.57 8.07 10.50

1989 1.98 16.72 (14.74) 15.17 7.93 7.24

1988 15.25 6.34 8.91 13.70 9.15 4.55

1987 4.57 (2.67) 7.24 13.89 8.83 5.06

1986 16.50 24.08 (7.58) 12.67 7.21 5.46

1985 26.08 31.54 (5.46) 13.50 8.99 4.51

1984 8.50 14.82 (6.32) 14.97 11.87 3.10

1983 21.80 2.23 19.57 15.74 10.70 5.04

1982 32.45 42.08 (9.63) 17.84 13.86 3.98

1981 7.56 0.48 7.08 15.97 12.08 3.89

1980 (1.00) (2.96) 1.96 13.46 10.23 3.23

1979 3.69 (0.86) 4.55 12.07 9.13 2.94

1978 7.57 (1.11) 8.68 10.92 8.11 2.81

Arithmetic Annual Average

1978–2009 11.00 8.34 2.66 12.22 6.99 5.23

Standard Deviation

15.57 11.74 18.34 3.20 2.78 2.95

Compound Annual Average

1978–2009 9.97 7.75 2.22

a Year-end yields.

Sources: Citi Yieldbook and author’s compilations.

Figure 30. Spread Between High-Yield Bonds YTM and 10-Yr Treasury

Notes, 1 Jun 07–31 Dec 09

Source: Citigroup Yieldbook Index Data

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

6/1/

2007

6/27

/200

7

7/23

/200

7

8/16

/200

7

9/11

/200

7

10/5

/200

7

10/3

1/20

07

11/2

6/20

07

12/2

0/20

07

1/17

/200

8

2/12

/200

8

3/7/

2008

4/2/

2008

4/28

/200

8

5/22

/200

8

6/17

/200

8

7/11

/200

8

8/6/

2008

9/1/

2008

9/25

/200

8

10/2

1/20

08

11/1

4/20

08

12/1

0/20

08

1/7/

2009

2/2/

2009

2/26

/200

9

3/24

/200

9

4/17

/200

9

5/13

/200

9

6/8/

2009

7/2/

2009

7/28

/200

9

8/21

/200

9

9/16

/200

9

10/1

2/20

09

11/5

/200

9

12/1

/200

9

12/2

8/20

09

6/12/07 (260bp)

12/16/08 (2,046bp)

12/31/09 (513bp)


33

New Issues and Other Changes in the High-Yield

Market

New high-yield bond issuance in 2009 increased dramatically to a record $171.9

billion — compared to $50.3 billion in 2008. The vast majority (almost 80%) of the

new issues were for refinancing both existing bonds and, especially, corporate loans.

The latter’s maturities were pushed out to 2013 and 2014, in many cases. New

issuance of leveraged loans diminished in 2009, however, with S&P estimating that

about $75 billion of new, US leveraged loans were issued during the year, down

from $153 billion in 2008. Clearly, the bond market has been the primary venue to

refinance the loan, as well as the bond, market in 2009.

The size of the high-yield bond market, adjusting for fallen angels, rising stars,

defaults, and other changes, was approximately $1.18 trillion at the end of 2009, up

$100 billion, from $1.08 trillion at the end of 2008 (see Figure 31). The increase over

last year is largely attributable to the three-fold increase in new issuance, as well as

the large amount of issues that were downgraded to non-investment grade ($127.6

billion). While the increase in the size of the high-yield bond market due to new

issuance is welcome news, the downgrade versus upgrade differential amount of

$114.9 billion is an indicator of further deterioration in credit fundamentals.

Figure 31. Market Changes in 2009 and Size of the High-Yield Bond

Market (Dollars in Billions)

Size of Market (as of December 2008) $1,083.6

New Issues $171.9

Fallen Angels $127.6 a

Rising Stars $(12.7) b

Defaults $(123.8)

Calls $(19.7)

Repurchases/Tenders $(30.5)

Maturities $(19.2)

Exchanges $5.8

Size of Market (as of December, 2009) $1,183.0

a First downgrade to noninvestment grade from either Moody’s or S&P.

b Must be investment

grade with both Moody’s and S&P.

Sources: Citigroup, Credit Suisse, and NYU Salomon Center.

Credit Quality and Trends in New Issuance

Figure 32 shows the proportion of new issue dollars rated B- or lower by S&P for

2009, and annually for 1993–2009. The proportion of this low-quality segment was

21.56% in 2009, slightly higher than the proportion of 17.49% from a year earlier,

but significantly below the average of 34.87% for the last five years. This trend is

consistent with the demand for quality experienced in all debt markets, and is

indicative of a diminution in the expected default rate for the two- to four-year

horizon. Still, the most recent two quarters of new issuance in 2009 saw a sizeable

increase in all credit quality levels, including the so-called ―bad cohort,‖ B- or lower

category, which went from 11.43% as of June 30 to 21.56% as of the entire year. In

the last six months, this proportion jumped 10.13%.


34

Figure 32. Percentage of New High-Yield Issues Rated B- or Below,

1993–2009 (Based on the Amount of Issuance)

51.25%

17.49%

18.16%

23.35%

19.40%

21.48%

27.27%

40.75%

30.41%

32.97%

13.73%

14.02%

29.55%

39.06%

33.00%

33.57%

21.56%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Standard & Poor’s Global Fixed Income Research.

Proportion and Size of the Distressed and Defaulted Public and Private Debt

Markets

The distressed and defaulted debt proportion of the high-yield plus defaulted debt

markets in the United States comprised roughly 31.5 %, as of December 31, 2009

down considerably from 85.2% one year earlier (Figure 33). The primary reason for

the steady decrease since December 31, 2008 was the drop in the distress ratio of

issues trading at least 1,000bp over the 10-yr US Treasury bond. The ―distress ratio‖

fell from 82.0% of high-yield bond market, as of year-end 2008, to 15.3% by the end

of 2009 and from 67% to 12% of the high-yield + defaulted debt markets. As a

result, the distressed segment comprised only 12% of the total high-yield plus

defaulted debt market ($1.463 trillion) as of year-end, while the defaulted segment

increased to 19%, its highest level since 2002, when it was also 19%.

Figure 33. Distresseda and Defaulted Debt, as a Percentage of Total

High Yield Plus the Defaulted Debt Market,b 1990–2009c

14%

26%

15%7% 5% 7%

13%19% 18%

14% 14% 13% 10%18% 19%

28%

17%

8%

6%

3%

9%

31% 22%

21%

5%

3% 4%1% 9%

67%

12%

2%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1990 1992 1993 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Defaulted Distressed

a

Defined as yield-to-maturity spread greater than or equal to 1,000bp over comparable

Treasuries. b

$1.463 trillion as of December 31, 2009. c

Some years not available as no

survey results are available.

Source: NYU Salomon Center, Merrill Lynch (Bank of America).


35

The defaulted bond amount total is derived by adding the new defaults of 2009

($123.82 billion) to the existing defaulted bonds as of year-end 2008, subtracting

those bonds of firms whose reorganization plans were deemed effective and have

emerged from Chapter 11 ($55.7 billion —Appendix G) and, finally, by deducting

the value of bonds which defaulted as part of a distressed exchange during the year

($22.9 billion). The latter, while part of our defaulted total, do not trade after the

exchange.

Figure 34. Estimated Face and Market Values of Defaulted and

Distressed Debt, 2007–2009 (Dollars in Billions)

Face Value ($) Market Value ($)

31 Dec 07 31 Dec 08 31 Dec 09 31 Dec 07 31 Dec 08 31 Dec 09 Market/

Face Ratiod

Public Debt

Defaulted 127.32 234.36 279.56 a

76.39 40.69 97.85 0.35

Distressed 113.56 888.53 181.00 b

85.17 488.69 135.75 0.75

Total Public 240.88 1,122.89 460.56 161.56 529.38 233.59

Private Debt

Defaulted 331.03 515.59 698.90 c

281.38 299.11 419.34 c

0.60

Distressed 295.26 1,954.76 452.50 c

265.74 1,368.33 362.00 c

0.80

Total Private 626.29 2,470.35 1,151.40 547.11 1,667.44 781.34

Total Public

and Private

867.18 3,593.24 1,611.96 708.68 2,196.82 1,014.93

a Calculated using: (2008 defaulted population) + (2009 defaults) - (2009 Emergences) –

(2009 Distressed Restructurings). b

Based on 15.3% of the size of the high-yield market

($1.183 trillion). c

Based on a private/public ratio of 2.5. d

The market/face value

ratio was 0.25 for public defaulted debt, 0.55 for public distressed debt, 0.60 for

private defaulted debt and 0.70 for private distressed debt in 2008.

Source: NYU Salomon Center and estimates by Professor Edward I. Altman.

Figure 34 shows our estimate of the size of the defaulted and distressed debt markets

for both public and privately issued debt. The estimated face value of distressed

public debt is $181.0 billion, down from $888.5 billion one year earlier. As

previously discussed, this is attributable to the decrease in the ―distressed ratio.‖

We are now using a private-to-public debt ratio of 2.5 times13

(increased from 2.2

times in prior reports) to estimate the amount of defaulted and distressed private debt

(mainly bank loans, mortgages, and trade debt). Applying the 2.5 ratio to our public

debt totals, we estimate the face value of private defaulted and distressed debt is $1.1

trillion. The total face value of public and private, defaulted and distressed debt as of

December 31, 2009, is an estimated $1.6 trillion (Figure 34). This is a staggering

decrease of about $2.0 trillion from one year earlier, due entirely to the decrease in

the distressed ratio. Figure 35 shows that the total face value of distressed and

defaulted debt was well above average in 2009 and higher than any year except

2008, but still decreased significantly from one year earlier.

As indicated in Figure 34, consistent with our observations of both newly defaulted

and existing defaulted loan issues in our NYU Salomon Center Index of Defaulted

Bond and Bank Loan performance, we have chosen to increase our market-to-face

13 Based on an updated sample of over 150 bankrupt firms from 2007-2009.


36

value ratios from year-end 2008. When applied, the market value estimate of

defaulted and distressed debt is about $1.01 trillion — down from the third quarter

and significantly lower than one year earlier.

Figure 35. Size of the Defaulted and Distressed Debt Market, 1990–

2009 (Dollars in Billions)

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

19901992

19931995

19981999

20002001

20022003

20042005

20062007

20082009

Face Value Market Value

Source: Professor Edward I. Altman estimates, NYU Salomon Center.


37

Forecasting Default Rates and Recoveries

Forecasting aggregate default and recovery rates is a tricky exercise that can be based

on a ―bottom-up‖ approach on individual issues and issuers or a macro, ―top-down‖

approach – or both. For practical and track-record reasons, we have chosen the top-

down approach using both aggregate amounts of new issuance over the last decade

stratified by the major ratings categories (mortality statistics) and also point-in-time

proportions of issuers by the major non-investment grade, high-yield bond

categories, but specific to recessionary results (scenario analysis). Finally, we also

analyze the information content of market-based measures, such as yield spreads and

distressed ratios, to forecast the near-term default performance of the market. These

four techniques are then averaged to arrive at our single default rate estimate,

although the range of probable outcomes can be observed as well. Our default rate

estimates are then used as the basis for estimates of aggregate recovery rates on

corporate high-yield bond defaults.

Using our standard mortality rate forecasting method (see our earlier discussion), our

forecast was higher than the actual rate in 2007, when credit markets were

abnormally buoyant. For 2008, we were pleased and a bit surprised that our forecast

of 4.64% for the high-yield bond default rate was remarkably close to the actual

2008 rate, which came in at 4.65% (Figure 36). We then expected our 2009 default

rate forecast to be on the low side, using the same mortality rate methodology. After

all, the mortality rate incidences of the past have been based on six recession periods

(see Figure 4) covering only about six-and-a-half years of the 38 in our sample

period (1971–2008). Therefore, a nonrecessionary, macroeconomic climate

dominates our statistics, and with a severe recession in place coming into 2009, we

expected the mortality rate methodology to underestimate the actual default results.

Indeed, the actual default rate was 10.74% in 2009 compared to our forecast of

7.98%, a respectable under-estimate. For this reason, we also in addition consider

recession scenario analyses and market-based statistics to provide useful estimates of

future results.

2010 Mortality Rate-Based Forecast

Utilizing the updated mortality rate statistics in Figure 27 and inputting new issuance

statistics per rating class over the past ten years, we estimate that the 2010 default

rate will be 5.06%, with a recovery rate of about 35% (Figure 36). Our forecast also

utilizes an estimate of the expected size of the high-yield bond market for 2010.

Figure 36. Mortality Rate-Based Forecasts of Default and Recovery

Rates in the High-Yield Bond Market, 2007–2010

Year Default Rate

Default Amount ($

Billion) Recovery Rate

2007 (Forecast) 2.50% $27.5 59.4%

2007 (Actual) 0.51% $5.5 66.6%

2008 (Forecast) 4.64% $53.1 39.6%a

2008 (Actual) 4.65% $50.2 42.5%

2009(Forecast) 7.98% $92.0 30.0%a

2009 (Actual) 10.74% $123.8 36.1%

2010 (Forecast) 5.06% $62.5 34.9%

a Based on the log-linear and linear default/recovery rate regressions (See Figure 21).

Sources: Mortality Rates (Figure 27), and Authors’ Estimates of Market Size in 2010.


38

Recession Scenario-Based Forecasts

Based on recent work (see last year’s Default Report, Altman & Karlin, 2009), we

observed the behavior of default rates during the two most recent recessions, 1991

and 200114

. Our forecasts are based on the proportional breakdown of the three major

high-yield noninvestment-grade rating categories (Ba, B, and Caa) just before these

recessions (Figure 37) and the subsequent default experience from these categories

(Figure 38). We then applied the breakdown of rating class percentages as of year-

end 2009 to estimate default rates for 2010, given the 1991 and 2001 recession

scenarios.

The resulting default rate forecast for 2009 is 15.8%, given a 1991 default scenario,

and 12.2% given a 2001 scenario, which are much higher than our mortality rate

estimate and assume that factors such as market conditions, structure, etc. will

remain quite similar as in the two prior recessions. Please note that these forecasts

are only relevant if the economy remains in a recessionary state or ―double-dips‖

sometime in the second-half of 2010, assuming the NBER declares that the 2008-

2009 recession ended in late 2009 or early 2010. We will use a 14% expectant

default rate in 2010 for this approach (the mean between 15.8% and 12.2%).

Figure 37. Rating Distributions Prior to Recessions (Percent of

Issuers)

1990 2000 2008a 2009

a

Ba/BB 54 32 43 33

B/B 44 54 35 49

Caa+Ca/C

CCC/CC 2 14 22 18

a Year-end based on Moody’s and S&P ratings in 2008 and 2009 (based on dollar amounts);

Moody’s only in prior years.

Figure 38. Scenario Based Forecasts of Default in the High-Yield

Bond Market, 2009 & 2010

Subsequent One-

Year

1991

Default Rate

2001

2009 Forecastsa

1991/2001

Scenarios

2010 Forecastsa

1991/2001

Scenarios

Ba/BB 4% 2% 1.7% / 0.9% 1.3% / 0.7%

B/B 6% 11% 5.6% / 3.9% 7.8% / 5.4%

Caa+Ca/C

CCC/CC 37% 34% 8.1% / 7.5% 6.7% / 6.1%

H.Y. Default

Rate

11.0% 10.6% 15.4% / 12.3% 15.8% / 12.2%

The total is based on the summation of the three rating category contributions.

Sources: NYU Salomon Center.

Market-Based Methods for Forecasting Defaults

In 2008, we introduced two alternative methods for forecasting default rates. The

first relies on the market’s spread on high-yield bonds compared to 10-yr US

Treasuries. The second utilizes the proportion of high-yield bonds selling at 1,000bp

over 10-yr US Treasuries (distressed ratio). In both cases, we regress the market-

based measure in period (t) and the subsequent one-year default rate in period (t+1).

Based on the yield-spread regression (Figure 39) on December 31, 2007, this method

predicted a 4.62% 2008 default rate, essentially a perfect forecast, and as of the end

14 Martin Fridson first reported this scenario approach in his article in the Distressed Debt Investor, September 28, 2006.


39

of 2008, it predicted an astounding 20.81% default rate. As of the end of 2009, we

estimate through this method that the cumulative default rate for the next 12 months,

ending December 2010, will be 3.89%.

Figure 39. Market-Based Forecast: Default Rate (t+1) Versus

Spreads (t)

Sources: Figures 1 and 29, NYU Salomon Center and authors’ compilation.

A second market-based method utilizes the distressed ratio, that is, the proportion of

the high-yield bond market trading at least 1,000bp over Treasuries. The updated

regression equation for 2008 is shown in Figure 40. Inserting the distressed ratio of

15.30% as of the end of 2009, the model reveals an expected 3.86% default rate for

year-end 2010.

Figure 40. Market-Based Forecast: Default Rate (t+1) Versus

Distressed Ratio (t)

Sources: Merrill Lynch & Co., NYU Salomon Center and authors’ compilation.

Default and Recovery Conclusions

Considering the various forecasting methods, we observe that the forecast range is

between 3.86% (distressed ratio) and 14.00% (recession scenarios). There is no

The regression equation is

Default Rate = - 3.25 + 1.39 * Spread

Predictor Coef SE Coef T P

Constant -3.2490 0.9072 -3.58 0.001

Spread 1.3904 0.1741 7.99 0.000

S = 1.86079 R-Sq = 69.5% R-Sq(adj) = 68.4%

Application

Applying Yield spread (12/31/2007) of 566 bps, PD = -3.25 + 1.39*5.66 = 4.617%Applying Yield spread (12/31/2008) of 1,731 bps, PD = -3.25 + 1.39*17.31 = 20.811%

Applying Yield spread (12/31/2009) of 513 bps, PD = -3.25 + 1.39*5.13 = 3.883%

The regression equation is

Default Rate = 0.942 + 0.190 * Distress Ratio

Predictor Coef SE Coef T P

Constant 0.9422 0.7596 1.24 0.233

Distress Ratio 0.19045 0.03579 5.32 0.000

S = 2.24391 R-Sq = 63.9% R-Sq(adj) = 61.6%

Application

Applying Distress Ratio (12/31/2007) of 10.42%, PD = 0.810 + 0.193*10.42 = 2.820%

Applying Distress Ratio (12/31/2008) of 82.00%, PD = 0.810 + 0.193*82.00 = 16.636%

Applying Distress Ratio (12/31/2009) of 15.30%, PD = 0.942 + 0.190 *15.30 = 3.856%


40

obvious way to reach a consensus from the different techniques, so we simply took

the average of the four to obtain our forecast of 6.70% (Figure 41). Inputting this

estimate into our recovery regression (Figure 21), we estimate that 2010’s high-yield

bond default recovery rate will be 31.8%, based on our log-linear model.

Note that the 6.70% forecast assumes that the recession scenario is relevant. If, as

most economists forecast, the U.S. economy does not experience a recession in 2010,

the three remaining default rate forecasting methods average to 4.27%, with a 36.7%

recovery rate (Figure 41). This implies a fairly normal default rate environment in

2010. Of course, if one assumes that the following year, 2011, will manifest renewed

stress in the economy, the default recession scenario will again be relevant.

Figure 41. 2010 Default and Recovery Forecasts: Summary of Forecast

Models

Model

2009 Default

Rate Forecast as

of 12/31/2008

12/31/2010

Recession Default

Rate Forecast as of

12/31/2009

12/31/2010

No Recession Default

Rate Forecast as of

12/31/2009

Mortality Rate 7.98% 5.06% 5.06%

Recession

Scenarios

14.05% 14.00% n/r

Spread 18.32% 3.89% b

3.89% b

Distressed Ratio 14.16% 3.86% c

3.86% c

Average of Models

(Recovery Rates)a

13.63%

(24.3%)

6.70%

(31.8%)

4.27%

(36.7%)

a Based on the log-linear regression (Figure 21).

b Based on 12/31/2009 yield-spread of

513.16bp. c Based on 12/31/2009 Distressed Ratio of 15.3%.

Sources: All Corporate Bond Issuance, Figures 27, 37-40, and Authors’ Estimates of Market

Size in 2010.


41

Appendix A

Quarterly Default Rate Comparison — Altman/SC and Moody’s, High-Yield

Debt Market, 1989–2009 (Dollars in Billions)

Quarter

Par Value Debt

Outstanding

($)

Debt Defaulted

By Quarter ($)

Quarterly

Default Rates

(%)

Altman/NYU-SC

12M Moving

Average (%)

Moody's 12-Mo.

Issuer Based

Moving Average

(%)

1989 1Q 165.00 1.15 0.70 2.45 3.25

2Q 172.00 1.40 0.81 2.11 2.70

3Q 189.26 3.07 1.62 3.47 4.39

4Q 185.00 2.49 1.35 4.29 5.93

8.11

1990 1Q 185.00 4.16 2.25 6.01 7.02

2Q 185.00 2.51 1.36 6.61 8.71

3Q 181.00 6.01 3.32 8.20 9.80

4Q 181.00 5.67 3.13 10.14 10.92

18.35

1991 1Q 182.00 8.74 4.80 12.67 13.24

2Q 182.00 2.75 1.51 12.73 13.99

3Q 183.00 5.01 2.74 12.18 13.03

4Q 183.00 2.36 1.29 10.31 10.97

18.86

1992 1Q 183.20 3.33 1.82 7.35 8.33

2Q 151.10 1.26 0.83 6.52 6.54

3Q 163.00 0.37 0.23 4.84 5.84

4Q 151.89 0.59 0.39 3.40 5.73

5.55

1993 1Q 193.23 0.38 0.20 1.71 5.34

2Q 193.23 1.33 0.69 1.39 4.93

3Q 206.91 0.05 0.03 1.22 4.52

4Q 190.42 0.52 0.27 1.10 3.79

2.29

1994 1Q 232.60 0.67 0.29 1.35 3.06

2Q 230.00 0.16 0.07 0.60 1.90

3Q 235.00 0.41 0.17 0.76 2.37

4Q 235.00 2.18 0.93 1.45 2.11

3.42

1995 1Q 240.00 0.17 0.07 1.24 1.42

2Q 240.00 1.68 0.70 1.85 2.41

3Q 240.00 0.98 0.41 2.09 2.60

4Q 240.00 1.72 0.72 1.90 3.56

4.55

1996 1Q 255.00 0.44 0.17 2.01 3.71

2Q 255.00 0.89 0.35 1.58 3.00

3Q 271.00 0.41 0.15 1.36 2.20

4Q 271.00 1.59 0.59 1.23 1.95

3.34

1997 1Q 296.00 1.85 0.63 1.75 1.87

2Q 318.40 0.60 0.19 1.51 1.92

3Q 335.40 1.48 0.44 1.74 2.33

4Q 335.40 0.27 0.08 1.25 2.20

4.20

1998 1Q 379.00 2.37 0.63 1.41 2.69

2Q 425.70 1.22 0.29 1.41 3.12

3Q 465.50 1.62 0.35 1.29 2.96

4Q 481.60 2.26 0.47 1.60 3.83

7.46


42

Quarterly Default Rate Comparison — Altman/SC and Moody’s, High-Yield

Debt Market, 1989–2009 (Dollars in Billions) (Continued)

Quarter

Par Value Debt

Outstanding

($)

Debt Defaulted

By Quarter ($)

Quarterly

Default Rates

(%)

Altman/NYU-SC

12M Moving

Average (%)

Moody's 12-Mo.

Issuer Based

Moving Average

(%)

1999 1Q 515.00 4.76 0.92 2.05 3.88

2Q 537.20 8.42 1.57 3.31 5.08

3Q 567.40 5.24 0.92 3.85 5.87

4Q 580.00 5.11 0.88 4.15 5.80

23.53

2000 1Q 584.00 6.06 1.04 4.28 6.36

2Q 595.60 9.97 1.67 4.52 6.61

3Q 597.50 4.32 0.72 4.27 6.64

4Q 608.15 9.95 1.64 5.07 7.03

30.29

2001 1Q 613.20 18.07 2.95 6.96 7.61

2Q 648.60 12.82 1.98 7.37 7.88

3Q 649.00 14.65 2.26 8.56 9.64

4Q 647.70 18.07 2.79 9.80 10.60

63.61

2002 1Q 669.00 18.54 2.77 9.89 11.00

2Q 674.00 27.07 4.02 11.71 10.03

3Q 757.00 37.48 4.95 15.01 8.63

4Q 756.30 13.77 1.82 12.80 6.96

96.86

2003 1Q 750.00 7.62 1.02 11.36 5.57

2Q 774.50 14.54 1.88 9.79 5.80

3Q 825.00 13.25 1.61 6.35 5.77

4Q 856.00 3.04 0.36 4.66 5.48

38.45

2004 1Q 886.00 3.07 0.35 3.96 4.73

2Q 919.60 1.75 0.19 2.38 4.01

3Q 933.10 3.80 0.41 1.27 3.11

4Q 948.50 3.04 0.32 1.25 3.01

11.66

2005 1Q 939.30 1.68 0.18 1.08 3.02

2Q 952.00 1.87 0.20 1.11 2.42

3Q 1,073.00 20.71 1.93 2.87 2.62

4Q 1066.10 11.95 1.12 3.37 2.54

36.21

2006 1Q 1039.00 3.39 0.33 3.56 2.43

2Q 1022.35 0.96 0.09 3.56 2.65

3Q 993.60 1.47 0.15 1.74 2.46

4Q 970.40 1.74 0.18 0.76 2.08

7.56

2007 1Q 1053.90 0.87 0.08 0.52 1.80

2Q 1066.80 1.82 0.17 0.56 1.92

3Q 1075.40 0.88 0.08 0.50 1.67

4Q 1069.90 1.91 0.18 0.51 0.90

5.47

2008 1Q 1089.90 3.57 0.33 0.76 1.74

2Q 1083.40 10.68 0.99 1.56 2.43

3Q 1091.00 5.02 0.46 1.95 3.40

4Q 1086.80 31.49 2.90 4.65 4.43

50.76

2009 1Q 1083.60 39.86 3.68 8.01 8.12

2Q 1082.60 43.86 4.05 11.09 11.60

3Q 1152.95 9.60 0.83 11.53 13.41

4Q 1177.41 30.51 2.59 10.74 13.22

123.82

Sources: Moody's, NYU Salomon Center, and Citi.


43

Appendix B

Defaulted Corporate Straight Debt Issues — 2009 (Dollars in Millions)


44

Company Bond Issue

Coupon

(%) Maturity Date

Outstanding

Amount ($MM) Default Date

Lyondell Basell (Equistar Chem., LP) Senior secured 7.55 2/15/2026 150.00 1/6/2009

Lyondell Basell (Lyondell Chemical) Senior secured 9.80 2/1/2020 225.00 1/6/2009

Lyondell Basell (Lyondell Chemical) Senior secured 10.25 11/1/2010 100.00 1/6/2009

Lyondell Basell (Millennium America) Senior unsecured 7.63 11/15/2026 241.00 1/6/2009

Lyondell Basell (Basell Fin. Co BV) Senior unsecured 8.10 3/15/2027 300.00 1/6/2009

Lyondell Basell (Industries AF) Senior secured 8.38 8/15/2015 615.00 1/6/2009

Merisant Co. Senior sub. 9.50 7/15/2013 0.30 1/9/2009



Nortel Networks Ltd. Senior unsecured 9.00 7/15/2011 999.80 1/14/2009

Nortel Networks Ltd. Unsecured 6.88 9/1/2023 200.00 1/14/2009

Nortel Networks Ltd. (Nortel Networks

Cap.)

Unsecured 7.88 6/15/2026 150.00 1/14/2009





Virgin River Casino Corp. Senior secured 9.00 1/15/2012 125.00 1/15/2009

Virgin River Casino Corp. Senior sub. 0.00 1/15/2013 66.00 1/15/2009

Spansion, LLC Senior unsecured 11.25 1/15/2016 250.00 1/15/2009

Eurofresh, Inc. Senior notes 11.50 1/15/2013 170.00 1/15/2009

Eurofresh, Inc. Senior sub. 0.00 1/15/2014 44.17 1/15/2009

Arantes International, Ltd. Senior notes 10.25 6/19/2013 150.00 1/19/2009

Smurfit-Stone Container Corp. Senior unsecured 8.00 3/15/2017 675.00 1/26/2009

Smurfit-Stone Container (Finance

Canada)

Senior unsecured 7.38 7/15/2014 200.00 1/26/2009

Smurfit-Stone Container (Jefferson

Smurfit)


Smurfit-Stone Container (Jefferson

Smurfit)


Smurfit-Stone Container Corp. Senior unsecured 8.38 7/1/2012 400.00 1/26/2009

Bonten Media Acquisition Co. Senior sub. 9.00 6/1/2015 27.60 1/30/2009

Station Casinos, Inc. Senior unsecured 6.00 4/1/2012 450.00 2/1/2009

Station Casinos, Inc. Senior sub. 6.63 3/15/2018 300.00 2/1/2009

Station Casinos, Inc. Senior unsecured 7.75 8/15/2016 400.00 2/1/2009



New Asat Finance Ltd. Senior notes 9.25 2/1/2011 150.00 2/1/2009

Indalex Holding Corp. Senior secured 11.50 2/1/2014 198.06 2/2/2009

Vitro SAB de CV Senior unsecured 8.63 2/1/2012 300.00 2/2/2009




Spectrum Brands, Inc. Senior sub. 7.38 2/1/2015 700.00 2/3/2009

Spectrum Brands, Inc. Senior sub. 12.50 10/2/2013 329.77 2/3/2009

Spectrum Brands, Inc. (Rayovac Corp.) Senior sub. 8.50 10/1/2013 2.87 2/3/2009

Intelsat Ltd. Senior unsecured 6.50 11/1/2013 346.45 2/11/2009

Intelsat Ltd. Senior unsecured 7.63 4/15/2012 114.16 2/11/2009

Pliant Corp. Senior secured 11.13 9/1/2009 250.00 2/11/2009



Aleris International, Inc. Senior unsecured 9.00 11/15/2014 0.09 2/12/2009



Aleris International, Inc. Senior sub. 10.00 12/15/2016 399.00 2/12/2009

Muzak, LLC Senior sub. 9.88 3/15/2009 115.00 2/12/2009

Muzak, LLC (Muzak Finance) Senior notes 10.00 2/15/2009 220.00 2/12/2009

Muzak, LLC (Muzak Holdings, LLC) Senior discount 13.00 3/15/2010 75.00 2/12/2009

Young Broadcasting, Inc. Senior sub. 8.75 1/15/2014 140.00 2/13/2009

Young Broadcasting, Inc. Senior sub. 10.00 3/1/2011 345.70 2/13/2009

Defaulted Corporate Straight Debt Issues — 2009 (Dollars in Millions) (Continued)

Company Bond Issue

Coupon

(%) Maturity Date

Outstanding


U.S. Shipping Partners, LP Senior secured 13.00 8/15/2014 100.00 2/15/2009


45

American Achievement Grp Hldg Corp. Senior unsecured 12.75 10/1/2012 104.30 2/25/2009

Spansion, LLCa Senior secured 4.39 6/1/2013 625.00 3/1/2009

Independencia International S.A. Senior unsecured 9.88 1/31/2017 225.00 3/2/2009

Independencia International S.A. Senior unsecured 9.88 5/15/2015 300.00 3/2/2009

Freescale Semiconductor, Inc.a Senior unsecured 5.87 12/15/2014 281.22 3/10/2009

Freescale Semiconductor, Inc. Senior unsecured 8.88 12/15/2014 844.58 3/10/2009

Freescale Semiconductor, Inc. Senior sub. 10.13 12/15/2016 958.08 3/10/2009

Milacron Escrow Corp. Senior secured 11.50 5/15/2011 225.00 3/10/2009

Fleetwood Enterprises, Inc. Senior sub. 14.00 12/15/2011 81.40 3/10/2009

Masonite Corp. Senior sub. 11.00 4/6/2015 412.00 3/16/2009



True Temper Sports, Inc. Senior sub. 8.38 9/15/2011 125.00 3/16/2009

Primus Telecommunication Group, Inc. Senior secured 14.25 5/20/2011 67.09 3/16/2009

Primus Telecommunication Group, Inc. Senior secured 14.25 5/20/2011 108.21 3/16/2009

Primus Telecommunication Group, Inc. Senior notes 8.00 1/15/2014 191.00 3/16/2009

Great Lakes Chem. Corp. (Chemtura) Senior unsecured 7.00 7/15/2009 370.00 3/18/2009

Chemtura Corp. Senior unsecured 6.88 6/1/2016 500.00 3/18/2009

Witco Corp. (Chemtura Corp.) Senior unsecured 6.88 2/1/2026 150.00 3/18/2009

OSI Restaurant Partners, LLC Senior unsecured 10.00 6/15/2015 240.00 3/20/2009

Freescale Semiconductor, Inc. Senior unsecured 9.13 12/15/2014 956.80 3/24/2009

Kraton Polymers, LLC Senior sub. 8.13 1/15/2014 30.00 3/26/2009

CCH II, LLC Senior unsecured 10.25 10/1/2013 238.51 3/27/2009



CCH I, LLC Senior secured 11.00 10/1/2015 4.13 3/27/2009



Charter Communications Op., LLC Senior secured 8.00 4/30/2012 1100.00 3/27/2009



CCO Holdings, LLC Senior unsecured 8.75 11/15/2013 800.00 3/27/2009





Charter Communications Holdings, LLC Senior unsecured 9.63 11/15/2009 25.56 3/27/2009


CCH I, LLC Senior unsecured 9.92 4/1/2014 470.91 3/27/2009
















NXP B.V. Senior notes 9.50 10/15/2015 244.00 3/30/2009

NXP B.V.a Senior secured 3.84 10/15/2013 154.00 3/30/2009

NXP B.V. Senior secured 7.88 10/15/2014 22.00 3/30/2009

Sensata Technologies B.V. Senior unsecured 8.00 5/1/2014 109.99 3/30/2009

Hexion U.S. Finance Corp.a Senior secured 5.38 11/15/2014 80.00 3/31/2009

Hexion U.S. Finance Corp. Senior secured 9.75 11/15/2014 92.00 3/31/2009

Barrington Broadcasting, LLC Senior sub. 10.50 8/15/2014 67.80 3/31/2009

Berry Plastics Corp. Senior sub. 10.25 3/1/2016 24.00 3/31/2009


Company Bond Issue Coupon (%) Maturity Date

Outstanding

Amount ($MM)

Default

Date


46

Idearc, Inc. Senior unsecured 8.00 11/15/2016 2849.88 3/31/2009

Idearc, Inc. Senior unsecured 8.00 11/15/2016 0.13 3/31/2009

Hollinger International Pub., Inc. Senior unsecured 9.00 12/15/2010 9.40 3/31/2009

Medianews Group, Inc. Senior sub. 6.88 10/1/2013 300.00 4/1/2009

Aventine Renewable Energy Hlds, Inc. Senior unsecured 10.00 4/1/2017 300.00 4/1/2009

Harrah's Operating Co., Inc. Senior unsecured 5.50 7/1/2010 86.80 4/1/2009

Harrah's Operating Co., Inc. (Park Place

Entertainment)

Senior sub. 7.88 3/15/2010 44.19 4/1/2009


Harrah's Operating Co., Inc. (Park Place

Entertainment)

Senior sub. 8.13 5/15/2011 47.09 4/1/2009





Harrah's Operating Co., Inc. Senior unsecured 10.75 2/1/2018 1,104.20 4/1/2009

Harrah's Operating Co., Inc. Senior unsecured 10.75 2/1/2016 3,456.57 4/1/2009

155 E. Tropicana, LLC Senior secured 8.75 4/1/2012 130.00 4/1/2009

CMP Susquehanna Corp. Senior sub. 9.88 5/15/2014 175.46 4/3/2009

Ford Motor Co. Senior unsecured 9.50 6/1/2010 155.56 4/3/2009

Ford Motor Co. Senior unsecured 7.45 7/16/2031 1,904.97 4/3/2009














Energy Partners, Ltd. Senior unsecured 0.00 4/15/2013 150.00 4/15/2009

Energy Partners, Ltd. Senior unsecured 9.75 4/15/2014 300.00 4/15/2009

Broder Brothers Co. Senior notes 11.25 10/15/2010 225.00 4/15/2009

Majestic Holdco, LLC Senior secured 12.50 10/15/2011 63.50 4/15/2009

Six Flags, Inc. Senior unsecured 9.75 4/15/2013 142.44 4/15/2009

French Lick Resorts & Casino, LLC 1st Mortgage 10.75 4/15/2014 31.70 4/15/2009

Abitibi Bowater, Inc. (Abitibi Cons

Canada)

Senior secured 13.75 4/1/2011 413.00 4/16/2009

Abitibi Bowater, Inc. (Bowater, Inc.)a Senior unsecured 4.32 3/15/2010 234.00 4/16/2009

Abitibi Bowater, Inc. (Bowater, Inc.) Senior unsecured 6.50 6/15/2013 400.00 4/16/2009


Finance)

Unsecured 7.88 8/1/2009 7.84 4/16/2009

Abitibi Bowater, Inc. (Bowater CAN

Finance)

Senior notes 7.95 11/15/2011 600.00 4/16/2009




Abitibi Bowater, Inc. (Abitibi Cons CAN)a Senior unsecured 4.81 6/15/2011 200.00 4/16/2009

Abitibi Bowater, Inc. (Abitibi Cons CAN) Senior unsecured 6.00 6/20/2013 350.00 4/16/2009

Abitibi Bowater, Inc. (Abitibi

Consolidated, Inc.)


Abitibi Bowater, Inc. (Abitibi Cons,

Inc.)



Canada)



Canada)



Abitibi Bowater, Inc. (Abitibi Cons,

Inc.)



Company Bond Issue Coupon Maturity Outstanding Default Date


47

(%) Date Amount ($MM)

Abitibi Bowater, Inc. (Abitibi Cons, Inc.) Senior unsecured 8.85 8/1/2030 450.00 4/16/2009

Abitibi Bowater, Inc. (Abitibi Cons Canada) Senior unsecured 15.50 7/15/2010 292.97 4/16/2009

Abitibi Bowater, Inc. (Bowater Pulp & Paper

Canada)b



Canada)b



Canada)b



Canada)b


Rouse Co. Senior unsecured 3.63 3/15/2049 400.00 4/16/2009


Rouse Co. (Rouse Co. LP/TRC Co-Issr) Senior unsecured 6.75 5/1/2013 800.00 4/16/2009



Dayton Superior Corp. Senior sub. 13.00 6/15/2009 154.73 4/19/2009

Source Interlink Companies, Inc. Senior unsecured 11.25 7/15/2015 465.00 4/21/2009

Chrysler, LLC Senior unsecured 12.38 5/1/2020 20.06 4/30/2009

Sabre Holdings Corp. Senior unsecured 7.35 8/1/2011 76.00 4/30/2009

Thornburg Mortgage, Inc. Senior sub. 18.00 3/31/2015 115.53 5/1/2009

Thornburg Mortgage, Inc. Senior unsecured 8.00 5/15/2013 305.00 5/1/2009

Thornburg Mortgage, Inc. Senior sub. 18.00 3/31/2015 1,133.18 5/1/2009

Thornburg Mortgage, Inc. Senior secured 18.00 3/31/2015 16.82 5/1/2009

Energy Partners, Ltd. Senior notes 8.75 8/1/2010 4.50 5/1/2009

Panolam Industries Intl, Inc. Senior sub. 10.75 10/1/2013 151.00 5/1/2009

Inn of the Mountain Gods Resort & Casino Senior unsecured 12.00 11/15/2010 200.00 5/15/2009

Greentown China Holdings, Ltd. Senior secured 9.00 11/8/2013 361.33 5/19/2009

Ion Media Networks, Inc.a Secured 4.38 1/15/2012 400.00 5/19/2009

Ion Media Networks, Inc. Senior secured 8.38 1/15/2013 448.07 5/19/2009

Harrah's Operating Co., Inc. Senior secured 10.00 12/15/2015 26.65 5/20/2009

Harrah's Operating Co., Inc. Senior secured 10.00 12/15/2018 38.12 5/20/2009

McClatchy Co. (Knight Ridder) Senior unsecured 4.63 11/1/2014 20.00 5/21/2009


Visteon Corp. Senior unsecured 12.25 12/31/2016 206.39 5/27/2009



Metaldyne Corp. Senior sub. 11.00 6/15/2012 34.09 5/27/2009

Metaldyne Corp. Senior unsecured 10.00 11/1/2013 4.60 5/27/2009

R.H. Donnelley Corp. (Dex Media West, LLC) Senior unsecured 5.88 11/15/2011 8.72 5/28/2009

R.H. Donnelley Corp. (Dex Media, Inc.) Senior unsecured 8.00 11/15/2013 500.00 5/28/2009

R.H. Donnelley Corp. (Dex Media West, LLC) Senior unsecured 8.50 8/15/2010 385.00 5/28/2009

R.H. Donnelley Corp. (Dex Media, Inc.) Senior unsecured 9.00 11/15/2013 388.24 5/28/2009

R.H. Donnelley Corp. (Dex Media, Inc.) Senior discount 9.00 11/15/2013 361.00 5/28/2009

R.H. Donnelley Corp. (Dex Media West, LLC) Senior sub. 9.88 8/15/2013 761.70 5/28/2009

R.H. Donnelley, Inc. Senior unsecured 11.75 5/15/2015 412.87 5/28/2009

R.H. Donnelley Corp. Senior unsecured 6.88 1/15/2013 206.79 5/28/2009

R.H. Donnelley Corp. Senior discount 6.88 1/15/2013 320.78 5/28/2009

R.H. Donnelley Corp. Senior discount 6.88 1/15/2013 483.49 5/28/2009

R.H. Donnelley Corp. Senior unsecured 8.88 1/15/2016 1,012.84 5/28/2009

R.H. Donnelley Corp. Senior unsecured 8.88 10/15/2017 4.00 5/28/2009

R.H. Donnelley Corp. Senior unsecured 8.88 10/15/2017 1,235.26 5/28/2009

Hawaii Superferry, Inc. US Government

Gty

5.73 5/30/2027 68.72 5/30/2009

Hawaii Superferry, Inc. US Government

Gty

5.80 2/28/2030 71.01 5/30/2009

Caraustar Industries, Inc. Senior unsecured 7.25 5/1/2010 29.00 5/31/2009

Caraustar Industries, Inc. Senior unsecured 7.38 6/1/2009 189.75 5/31/2009

General Motors Corp. Pass thru Certs 8.95 7/2/2009 19.18 6/1/2009

General Motors Corp. Senior unsecured 6.75 5/1/2028 600.00 6/1/2009

General Motors Corp. Senior unsecured 7.13 7/15/2013 1,000.00 6/1/2009





48


Company Bond Issue

Coupon

(%) Maturity Date

Outstanding













Lear Corp. Senior unsecured 8.75 12/1/2016 589.93 6/1/2009


Finlay Fine Jewelry Corp. Senior unsecured 8.38 6/1/2012 40.60 6/1/2009

Hawker Beechcraft Acquisition Co.,

LLC



LLC



LLC

Senior sub. 9.75 4/1/2017 75.50 6/2/2009

William Lyon Homes Inc. Senior unsecured 10.75 4/1/2013 2.38 6/5/2009



Affinity Group, Inc. Senior sub. 9.00 2/15/2012 14.60 6/5/2009

Hexion Specialty Chemicals, Inc. Senior unsecured 7.88 2/15/2023 10.78 6/8/2009



Momentive Performance Matls, Inc. Senior unsecured 9.75 12/1/2014 48.40 6/9/2009

Momentive Performance Matls, Inc. Senior unsecured 10.13 12/1/2014 140.90 6/9/2009

Momentive Performance Matls, Inc. Senior sub. 11.50 12/1/2016 118.10 6/9/2009

Fontainebleau Las Vegas Hldgs, LLC 2nd Mortgage Notes 10.25 6/15/2015 675.00 6/9/2009



Buffalo Thunder Development

Authority

Senior secured 9.38 12/15/2014 245.00 6/15/2009

Extended Stay America Senior sub. 9.88 6/15/2011 8.15 6/15/2009

Interactive Health, LLC Senior notes 7.25 4/1/2011 83.97 6/15/2009

Advanta Capital Trust 1 Junior sub. 8.99 12/17/2026 10.80 6/15/2009



McClatchy Co. (Knight Ridder) Debentures 6.88 3/15/2029 23.80 6/25/2009


McClatchy Co. (Knight Ridder) Debentures 7.15 11/1/2027 10.80 6/25/2009

Allis-Chalmers Energy, Inc. Senior unsecured 8.50 3/1/2017 44.20 6/26/2009

Allis-Chalmers Energy, Inc. Senior unsecured 9.00 1/15/2014 30.56 6/26/2009

Beazer Homes USA, Inc. Senior unsecured 8.63 5/15/2011 5.00 6/30/2009





Medianews Group, Inc. Senior sub. 6.38 4/1/2014 150.00 7/1/2009

NXP B.V. Senior notes 9.50 10/15/2015 57.50 7/1/2009

NXP B.V.a Senior secured 3.88 10/15/2013 121.60 7/1/2009

NXP B.V. Senior secured 7.88 10/15/2014 90.10 7/1/2009


Rathgibson, Inc. Senior unsecured 11.25 2/15/2014 200.00 7/13/2009

Hovnanian Enterprises, Inc. Senior unsecured 8.21 4/1/2012 49.43 7/20/2009


Georgia Gulf Corp. Senior unsecured 9.50 10/15/2014 486.80 7/24/2009

Georgia Gulf Corp. Senior sub. 10.75 10/15/2016 158.10 7/24/2009

Georgia Gulf Corp. Senior unsecured 7.13 12/15/2013 91.00 7/24/2009

Unisys Corp. Senior unsecured 6.88 3/15/2010 235.09 7/28/2009



49


Company Bond Issue

Coupon

(%) Maturity Date

Outstanding




Haights Cross Communications, Inc. Senior discount 12.50 8/15/2011 135.00 8/1/2009

Commercial Vehicle Group, Inc. Senior notes 8.00 7/1/2013 52.20 8/3/2009

Cooper-Standard Automotive, Inc. Senior unsecured 7.00 12/15/2012 200.00 8/3/2009

Cooper-Standard Automotive, Inc. Senior sub. 8.38 12/15/2014 323.00 8/3/2009

American Achievement Group Hldg

Corp.


Finlay Fine Jewelry Corp. Senior secured 8.38 6/1/2012 173.98 8/5/2009

Finlay Fine Jewelry Corp. Senior secured 11.38 6/1/2012 22.80 8/5/2009

Duane Reade, Inc. Senior sub. 9.75 8/1/2011 143.29 8/6/2009

CIT Group, Inc. Senior unsecured 0.97 8/17/2009 598.10 8/14/2009

Colonial BancGroup, Inc. Subordinated notes 8.88 3/15/1938 250.00 8/14/2009

Colonial BancGroup, Inc. (Colonial

Bank)

Subordinated notes 9.38 6/1/2011 56.80 8/14/2009

Colonial BancGroup, Inc. (Colonial

Bank)

Subordinated notes 6.38 12/1/2015 280.00 8/14/2009

Colonial BancGroup, Inc. (CBG

Florida REIT)

Unsecured 7.11 5/15/1949 300.00 8/14/2009

Novamerican Steel, Inc. Senior secured 11.50 11/15/2015 315.00 8/14/2009

Haights Cross Communications, Inc.

(Operating Co.)


Little Traverse Bay Bands Odawa

Indians

Senior notes 10.25 2/15/2014 122.00 8/15/2009

Stanley-Martin Communities, LLC Senior sub. 9.75 8/15/2010 133.32 8/15/2009

E Trade Financial Corp. Senior unsecured 8.00 6/15/2011 429.62 8/19/2009

E Trade Financial Corp. Senior unsecured 12.50 11/30/2014 1,310.00 8/19/2009

Readers Digest Association, Inc. Senior sub. 9.00 2/15/2017 600.00 8/24/2009

Clear Channel Communications, Inc. Senior unsecured 6.25 3/15/2011 20.20 8/27/2009









Samsonite Corp. Senior sub. 8.88 6/1/2011 0.26 9/1/2009

MxEnergy Holdings, Inc.a Senior unsecured 8.43 8/1/2011 158.79 9/18/2009

Velocity Express Corp. Senior secured 18.00 12/30/2010 86.01 9/24/2009

Appleton Papers, Inc. Senior sub. 9.75 6/15/2014 109.73 9/25/2009

Appleton Papers, Inc. Senior unsecured 8.13 6/15/2011 91.94 9/25/2009

Citizens Republic Bancorp, Inc. Subordinated 5.75 2/1/2013 108.00 9/25/2009

Newpage Corp. Senior secured 10.00 5/1/2012 22.97 9/25/2009

Newpage Corp.a Senior secured 6.73 5/1/2012 2.24 9/25/2009

Realogy Corp. Senior unsecured 11.00 4/15/2014 220.00 9/30/2009

Fairpoint Communications, Inc. Senior unsecured 13.13 4/1/2018 91.52 10/1/2009

Fairpoint Communications, Inc. Senior unsecured 13.13 4/2/2018 439.57 10/1/2009

Canwest Media, Inc. Senior sub. 8.00 9/15/2012 761.05 10/7/2009

Accuride Corp. Senior sub. 8.50 2/1/2015 275.00 10/8/2009







Stallion Oilfield Services, Inc. Senior unsecured 9.75 2/1/2015 300.00 10/19/2009

Atlantic Express Transportation

Corp.a

Senior secured 7.53 4/15/2012 183.00 10/20/2009

Nortek, Inc. Senior sub. 8.50 9/1/2014 624.50 10/21/2009

Nortek, Inc. Senior sub. 9.88 6/15/2011 10.00 10/21/2009

NTK Holdings, Inc. Discount 10.75 3/1/2014 403.00 10/21/2009

Nortek, Inc. Senior secured 10.00 12/1/2013 750.00 10/21/2009



50


Company Bond Issue

Coupon

(%) Maturity Date

Outstanding




Capmark Financial Group, Inc. Senior unsecured 5.88 5/10/2012 1,200.00 10/25/2009

Capmark Financial Group, Inc. Senior unsecured 6.30 5/10/2017 500.00 10/25/2009

Capmark Financial Group, Inc. Senior unsecured 0.00 5/10/2010 637.50 10/25/2009

Libbey Glass, Inc. Senior sub. 16.00 12/1/2011 160.86 10/28/2009

Anthracite Capital, Inc. Senior notes 7.22 10/30/2016 50.00 10/30/2009

Anthracite Capital, Inc. Senior unsecured 8.13 7/30/2017 37.50 10/30/2009

Anthracite Capital, Inc. Senior unsecured 7.77 7/30/2017 50.00 10/30/2009

CIT Group, Inc. Senior Unsecured 0.53 12/21/2009 113.00 11/1/2009

CIT Group, Inc. Senior Unsecured 0.42 3/12/2010 1,000.00 11/1/2009









CIT Group Funding Co. of Canada Senior Unsecured 4.65 7/1/2010 990.49 11/1/2009

















CIT Group, Inc. Junior Sub. 6.10 3/15/2067 750.00 11/1/2009

Tyco Capital Corp. Pass thru Certs./

Secured

6.49 1/5/2021 165.46 11/1/2009


CIT Group, Inc. Senior Unsecured 7.63 11/30/2012 1,277.65 11/1/2009


Alphagen Power, LLC Bond Issue 9.02 6/30/2024 155.17 11/1/2009

CIT Group, Inc. Subordinated 12.00 12/18/2018 1,149.01 11/1/2009

CIT Group, Inc. Senior Unsecured Various Various 3,196.25 11/1/2009

Advanta Capital Trust 1 Junior sub. 8.99 12/17/2026 89.20 11/8/2009

Energy Future Holdings Corp. Senior unsecured 5.55 11/15/2014 17.30 11/10/2009





Energy Future Holdings Corp. (TCEH) Senior unsecured 10.25 11/1/2015 55.90 11/10/2009

Energy Future Holdings Corp. (TCEH) Senior unsecured 10.25 11/1/2015 87.20 11/10/2009

Energy XXI Gulf Coast, Inc. Senior unsecured 10.00 6/15/2013 347.50 11/11/2009

Simmons Co. Senior discount 0.00 12/15/2014 0.25 11/16/2009

Simmons Co. Senior sub. 7.88 1/15/2014 200.00 11/16/2009

Simmons Co. Senior discount 0.00 12/15/2014 268.75 11/16/2009

GSI Group, Inc. Senior unsecured 11.00 8/15/2013 210.00 11/20/2009


51


Company Bond Issue

Coupon

(%) Maturity Date

Outstanding


Ahern Rentals, Inc. Senior secured 9.25 8/15/2013 252.47 12/23/2009

USF Corp. (YRC Worldwide, Inc.) Senior unsecured 8.50 4/15/2010 105.00 12/30/2009

Total 123,824

Total Number of Issues 405

Total Number of Companies 119 aFRN.

bYankee bond.



52

Appendix C

Distressed Exchanges, 2009

Issuer Name

Distressed

Exchange Date

Amount Exchanged

($ Millions)

Bonten Media Acquisition Co. 1/30/2009 27.60

Intelsat Ltd. 2/11/2009 460.61

American Achievement Group Holding Corp. 2/25/2009 104.30

Freescale Semiconductor, Inc. 3/10/2009 3,040.67

OSI Restaurant Partners, LLC 3/20/2009 240.00

Kraton Polymers, LLC 3/26/2009 30.00

Sensata Technologies B.V. 3/30/2009 109.99

NXP B.V. 3/30/2009 420.00

Berry Plastics Corp. 3/31/2009 24.00

Hexion U.S. Finance Corp. 3/31/2009 172.00

Barrington Broadcasting, LLC 3/31/2009 67.80

Harrah's Operating Co., Inc. 4/01/2009 5,550.78

CMP Susquehanna Corp. 4/03/2009 175.46

Ford Motor Co. 4/03/2009 3,353.91

French Lick Resort & Casino, LLC 4/15/2009 31.70

Sabre Holdings Corp. 4/30/2009 76.00

Greentown China Holdings, Ltd. 5/19/2009 361.33

Harrah's Operating Co., Inc. 5/20/2009 64.77

McClatchy Co. (Knight Ridder) 5/21/2009 150.00

Hawker Beechcraft Acquisition Co., LLC 6/02/2009 274.47

William Lyon Homes, Inc. 6/05/2009 53.14

Affinity Group, Inc. 6/05/2009 14.60

Hexion Specialty Chemicals, Inc. 6/08/2009 21.10

Momentive Performance Materials, Inc. 6/09/2009 307.40

Advanta Capital Trust I 6/15/2009 10.80

Interactive Health, LLC 6/15/2009 83.97

McClatchy Co. (Knight Ridder) 6/25/2009 102.90

Allis-Chalmers Energy, Inc. 6/26/2009 74.76

Beazer USA Homes, Inc. 6/30/2009 108.50

NXP B.V. 7/01/2009 269.20

Hovnanian Enterprises, Inc. 7/20/2009 101.35

Georgia Gulf Corp. 7/24/2009 735.90

Unisys Corp. 7/28/2009 760.41

Commercial Vehicle Group, Inc. 8/03/2009 52.20

American Achievement Group Holding Corp. 8/05/2009 65.34

Duane Reade, Inc. 8/06/2009 143.29

CIT Group, Inc. 8/14/2009 598.10

E Trade Financial Corp. 8/19/2009 1,739.62

Clear Channel Communications, Inc. 8/27/2009 412.13

Beazer USA Homes, Inc. 9/01/2009 124.30

MxEnergy Holdings, Inc. 9/18/2009 158.79

Appleton Papers, Inc. 9/25/2009 201.66

Citizens Republic Bancorp, Inc. 9/25/2009 108.00

Newpage Corp. 9/25/2009 25.20

Realogy Corp. 9/30/2009 220.00

Hovnanian Enterprises 10/19/2009 199.02

Atlantic Express Transportation Corp. 10/20/2009 183.00

William Lyon Homes, Inc. 10/23/2009 72.51

Libbey Glass, Inc. 10/28/2009 160.86

Energy Future Holdings Corp. 11/10/2009 357.50

Energy XXI Gulf Coast, Inc. 11/11/2009 347.50

Ahern Rentals, Inc. 12/23/2009 252.47

USF Corp. (YRC Worldwide, Inc.) 12/30/2009 105.00

Total $ Amount of Distressed Exchanges $22,905.90

Total Number of Issuers 45


53

Appendix D

Leveraged Loan Defaults, 2009

Company Default Date

United States Shipping, LLC 6 Jan 09

LyondellBasell Industries 6 Jan 09

Northeast Biofuels, LLC 14 Jan 09

Foamex International, Inc. 23 Jan 09

Smurfit-Stone Container Corp. 26 Jan 09

Spectrum Brands, Inc. 3 Feb 09

Cygnus Business Media, Inc. 10 Feb 09

Aleris International, Inc. 12 Feb 09

Young Broadcasting, Inc. 17 Feb 09

Bearing Point, Inc. 18 Feb 09

Masonite Corp. 16 Mar 09

General Growth Properties, Inc. 17 Mar 09

True Temper Sports, Inc. 17 Mar 09

Charter Communications Holdings, LLC 27 Mar 09

Idearc, Inc. 31 Mar 09

Riviera Holdings Corp. 1-Apr-09

Rhodes Homes 1-Apr-09

United Subcontractors, Inc. 1-Apr-09

MediaNews Group, Inc. 1-Apr-09

Airborne Health, Inc. 28-Apr-09

Mark IV Industries, Inc. 30-Apr-09

GSC Group, Inc. 5-May-09

November 2005 Land Investors, LLC 12-May-09

Atrium Companies, Inc. 18-May-09

JG Wentworth, LLC 19-May-09

Paxson Communications Television, Inc. 20-May-09

Visteon Corp. 28-May-09

Metaldyne Corp. 28-May-09

R.H. Donnelley Corp. 29-May-09

General Motors Corp. 1-Jun-09

Fontainebleau Resorts, LLC 10-Jun-09

Six Flags, Inc. 14-Jun-09

Building Materials Holding Corp. 16-Jun-09

Wembley 23-Jun-09

Express Energy Services Operating, LP 2-Jul-09

Panolam Industries International, Inc. 2-Jul-09

Lear Corp. 1-Jul-09

J.L. French Automotive Castings, Inc. 13-Jul-09

New Vision Television, LLC 14-Jul-09

Euramax International 14-Jul-09

Wilton Paper Crafts, Inc. 20-Jul-09

Hicks Sports Group, LLC 31-Jul-09

CanWest Media, Inc. 31-Jul-09

Cooper Standard Automotive, Inc. 3-Aug-09

Dynea North America 10-Aug-09

Readers Digest Association, Inc. 25-Aug-09

Trident Exploration Corp. 9-Sep-09

Stallion Oilfield Services, Ltd 21-Sep-09

Targus Group International, Inc. 30-Sep-09

Fairpoint Communications, Inc. 1-Oct-09

Questex Media Group, Inc. 5-Oct-09

Advanstar Communications, Inc. 6-Oct-09

Accuride Corp. 8-Oct-09

Champion Home Builders Co. 15-Oct-09

Metro-Goldwyn-Mayer, Inc. 19-Oct-09

California Coastal Communities, Inc. 28-Oct-09

Centaur, LLC 28-Oct-09

GPX International Tire Corp. 29-Oct-09

Endurance Business Media, Inc. 30-Oct-09

Simmons Co. 16-Nov-09


54

Leveraged Loan Defaults, 2009 (Continued)

Company Default Date

White Birch Paper Co. 17-Nov-09

Quality Home Brands Holdings, LLC 4-Dec-09

Citadel Broadcasting Corp. 21-Dec-09

NextMedia Operating, Inc. 21-Dec-09

Total Number of Companies 64

Source: S&P LCD.


55

Appendix E

Chapter 11 Filings in 2009 — Listed by Liability Size, Liabilities

Greater Than $100 Million (Dollars in Millions)


56

Company

Date of

Filing Liabilities ($)

General Motors Corp. Jun-09 172,810.00

CIT Group, Inc. Nov-09 64,901.20

Chrysler, LLC Apr-09 55,200.00

General Growth Properties, Inc. Apr-09 27,293.73

Thornburg Mortgage, Inc. May-09 24,700.00

Charter Communications, Inc. Mar-09 24,185.67

Capmark Financial Group, Inc. Oct-09 21,000.00

Lyondell Chemical Co. Jan-09 19,337.00

R.H. Donnelley Corp. May-09 12,374.08

Nortel Networks, Inc. Jan-09 10,867.00

Idearc, Inc. Mar-09 9,515.00

Abitibi Bowater, Inc. Apr-09 8,783.00

Extended Stay America, Inc. Jun-09 7,600.00

Station Casinos, Inc. Jul-09 6,482.64

Smurfit-Stone Container Jan-09 5,582.00

Visteon Corp. May-09 5,324.03

Lear Corp. Jul-09 4,536.00

Spectrum Brands, Inc. Feb-09 4,445.81

Aleris International, Inc. Feb-09 4,233.60

Six Flags, Inc. Jun-09 3,431.65

Reader's Digest Association, Inc. Aug-09 3,400.00

Fairpoint Communications, Inc. Oct-09 3,254.47

Erickson Retirement Communities, LLC Oct-09 3,000.00

NTK Holdings, Inc. (Nortek, Inc.) Oct-09 2,778.10

Masonite Corp. Mar-09 2,641.59

Citadel Broadcasting Corp. Dec-09 2,464.31

Spansion, Inc. Mar-09 2,398.00

Bearingpoint, Inc. Feb-09 2,231.84

Source Interlink Companies, Inc. Apr-09 1,995.50

Ion Media Networks, Inc. May-09 1,936.00

Cooper Standard Holdings, Inc. Aug-09 1,785.04

Trump Entertainment Resorts Feb-09 1,737.73

Samsonite Corp. Sep-09 1,500.00

Opus West, LP Jul-09 1,460.00

Hayes Lemmerz International, Inc. May-09 1,405.20

Simmons Co. Nov-09 1,263.55 Herbst Gaming, Inc. Mar-09 1,241.94 Tronox, Inc. Jan-09 1,221.60 Freedom Commuications, Inc. Sep-09 1,077.00 Magnachip Semiconductor, LLC Jun-09 1,041.00 Tarragon Corp. Jan-09 1,035.58 Pliant Corp. Feb-09 1,032.63 Chemtura Corp. Mar-09 1,020.00

a BNC Mortgage, LLC Jan-09 1,000.00

a Crescent Resources, LLC Jun-09 1,000.00

a Fontainebleau Las Vegas Holdings, LLC Jun-09 1,000.00

a Mark IV Industries, Inc. Apr-09 1,000.00

a Qimonda N.A. Corp. Feb-09 1,000.00

a Sea Launch Co., LLC Jun-09 1,000.00

a Taylor, Bean & Whitaker Mortgage Corp. Aug-09 1,000.00 Young Broadcasting, Inc. Feb-09 980.43 Magna Entertainment Corp. Mar-09 958.59 WL Homes, LLC Feb-09 937.00 Apex Silver Mines Ltd. Jan-09 930.91 Metaldyne Corp. May-09 929.00 Accuride Corp. Oct-09 847.02 Fairfield Residential, LLC Dec-09 839.40


Greater Than $100 Million (Dollars in Millions) (Continued)

Company

Date of

Filing Liabilities ($)

Sun-Times Media Group, Inc. Mar-09 801.00

Milacron, Inc. Mar-09 752.00

b Bodie Electrical Contractors of Florida, Jan-09 750.00


57

Inc.

b CCS Medical, Inc. Jul-09 750.00

b DBSD North America, Inc. May-09 750.00

b Eastwind Maritime, Inc. Jun-09 750.00

b Good Samaritan Hospice USA, Inc. Feb-09 750.00

b Hawkeye Renewables, LLC Dec-09 750.00

b Plant Insulation Co. May-09 750.00

b Primus Telecommunication Group, Inc. Mar-09 750.00

b QHB Holdings, LLC (Generation Brands) Dec-09 750.00

b Stallion Oilfied Services Ltd. Oct-09 750.00

b Trident Resources Corp. Sep-09 750.00

b UTGR, Inc. Jun-09 750.00

Majestic Star Casino, LLC Nov-09 749.56

Energy Partners Ltd. May-09 708.37

Journal Register Co. Feb-09 706.27

Star Tribune Holdings Corp. Jan-09 661.10

Fleetwood Enterprises, Inc. Mar-09 623.55

US Shipping Partners, LP Apr-09 606.53

Merisant Worldwide, Inc. Jan-09 560.70

BankUnited Financial Corp. May-09 559.74

Champion Enterprises, Inc. Nov-09 532.76

Silicon Graphics, Inc. Apr-09 526.55

Muzak Holdings, LLC Feb-09 503.00

Aventine Renewable Energy Holdings, Inc. Apr-09 490.66

Building Materials Holding Corp. Jun-09 481.31

Sportsman's Warehouse, Inc. Mar-09 452.10

Transmeridian Exploration, Inc. Mar-09 451.68

Vineyard National Bancorp. Jul-09 449.77

Panolam Industries International, Inc. Nov-09 447.50

Eddie Bauer Holding, Inc. Jun-09 426.71

Dayton Superior Corp. Apr-09 405.87

Pacific Energy Resources, Ltd. Mar-09 398.00

Finlay Enterprises, Inc. Aug-09 385.48

Barzel Industries, Inc. Sep-09 384.60 Colonial Bancgroup, Inc. Aug-09 380.00 Foamex International, Inc. Feb-09 379.71 Caraustar Industries, Inc. May-09 376.85 GSI Group, Inc. Nov-09 370.00 Pacific Ethanol, Inc. May-09 347.93 Arclin US Holdings, Inc. Jul-09 347.30 Meruelo Maddux Properties, Inc. Mar-09 342.02

Advanta Corp. Nov-09 331.00

Crusader Energy Group, Inc. Mar-09 325.84

Guaranty Financial Group, Inc. Aug-09 323.41

TXCO Resources, Inc. May-09 322.83

Questex Media Group, Inc. Oct-09 321.00

Rathgibson, Inc. Jul-09 319.20 True Temper Sports, Inc. Oct-09 319.03 Decode Genetics, Inc. Nov-09 313.92 Fortunoff Holdings, LLC Feb-09 305.80 Broadstripe, LLC Jan-09 303.64 Midway Games, Inc. Feb-09 281.03 Hartmarx Corp. Jan-09 261.22

c 2008 Asset Holding Corp. Jun-09 250.00

c Accredited Home Lenders Holding May-09 250.00

c AGT Crunch Acquisition, LLC May-09 250.00

c Amaravathi Ltd. Partnership Apr-09 250.00

c American Housing Foundation Jun-09 250.00


58



Company

Date of

Filing Liabilities ($) c ARG Enterprises, Inc. Jan-09 250.00

c Axia, Inc. Dec-09 250.00

c Banex 1, LLC Apr-09 250.00

c Basha's, Inc. Jul-09 250.00

c Bethany Rolling Hills, LLC Apr-09 250.00

c Bi-Lo, LLC Mar-09 250.00

c Bruno's Supermarkets, LLC Feb-09 250.00

c Cabi Downtown, LLC Aug-09 250.00

c Cambridge-Lee Holdings, Inc. Dec-09 250.00

c Carver Italia, LLC Jun-09 250.00

c Cascade Grain Products, LLC Jan-09 250.00

c Catholic Diocese Of Wilmington, Inc. Oct-09 250.00

c CCI Funding I, LLC Feb-09 250.00

c CommerceConnect Media Holdings, Inc. Aug-09 250.00

c Coyotes Hockey, LLC May-09 250.00

c Crown Village Farm, LLC May-09 250.00

c Crucible Materials Corp. May-09 250.00

c Deep Marine Technology, Inc. Dec-09 250.00

c Dewey Ranch Hockey, LLC May-09 250.00

c Drug Fair Group, Inc. Mar-09 250.00

c Ennis Homes, Inc. Feb-09 250.00

c Ennis Land Development, Inc. Jul-09 250.00

c Ennstone, Inc. Feb-09 250.00

c Equipment Acquisition Resources, Inc. Oct-09 250.00

c Escada (USA), Inc. Aug-09 250.00

c Eurofresh, Inc. Apr-09 250.00

c Filene's Basement, Inc. May-09 250.00

c First Republic Group Realty, LLC Jun-09 250.00

c Forum Health Outreach Laboratories, Inc. Mar-09 250.00

c FRGR Managing Member, LLC Mar-09 250.00

c Fulton Homes Corp. Jan-09 250.00

c G.I. Joe's Holding Corp. Mar-09 250.00

c Galleria (Hong Kong) Ltd. Sep-09 250.00

c Global Safety Textiles Holdings, LLC Jun-09 250.00

c Goody's, LLC Jan-09 250.00

c GPX Interrnational Tire Corp. Oct-09 250.00

c Greenbrier Hotel Corp. Mar-09 250.00

c GTS Property Portfolios B-3, LLC Mar-09 250.00

c Gulfstream Aptartment Portfolio, LLC Mar-09 250.00

c Hereford Biofuels Holdings, LLC Jan-09 250.00

c Hill Country Galleria, LP May-09 250.00

c Holley Performance Products, Inc. Sep-09 250.00

c HSF Holding, Inc. May-09 250.00

c Indalex Holdings Finance, Inc. Mar-09 250.00

c J.G. Wentworth May-09 250.00

c J.L. French Automotive Castings, Inc. Jul-09 250.00

c KLCG Property, LLC Dec-09 250.00

c L.A. Hotel Venture, LLC Apr-09 250.00

c Lazy Days' RV Center, Inc. Nov-09 250.00

c Lewis Equipment Co., Inc. Sep-09 250.00

c Lifemasters Supported Self Care, Inc. Sep-09 250.00

c MIG, Inc. (Metromedia International Group,

Inc.)

Jun-09 250.00

c MMC Precision Holdings Corp. Mar-09 250.00

c Nexpak Corp. Apr-09 250.00

c Nextmedia Group, Inc. Dec-09 250.00

c November 2005 Land Investors, LLC May-09 250.00

c NV Broadcasting, LLC Jul-09 250.00

c Park Lane I, LLC Apr-09 250.00

c Philadelphia Newspapers, LLC Feb-09 250.00

c Phoenix Kingdom LI, LLC Jul-09 250.00


59



Company

Date of

Filing Liabilities ($) c Protostar Ltd. Jul-09 250.00

c Provident Royalties, LLC Jun-09 250.00

c PTC Alliance Corp. Oct-09 250.00

c RadLAX Gateway Hotel, LLC Aug-09 250.00

c Recticel Interiors N.A., LLC Oct-09 250.00

c Recycled Paper Greetings Jan-09 250.00

c Regal Jets, LLC Feb-09 250.00

c Renew Energy, LLC Jan-09 250.00

c Ritz Camera Centers, Inc. Feb-09 250.00

c River Woods, LLC May-09 250.00

c Shane Co. Jan-09 250.00

c Taylor-Wharton International, LLC Nov-09 250.00

c Titlemax Holdings, LLC Apr-09 250.00

c Trilogy Development Co., LLC May-09 250.00

c United Subcontractors, Inc. Mar-09 250.00

c Valley View Downs, LP Oct-09 250.00

c White Energy, Inc. May-09 250.00

Latham International, Inc. Dec-09 239.49

Edge Petroleum Corp. Oct-09 234.00

California Coastal Communities, Inc. Oct-09 231.00

The Fairchild Corp. Mar-09 228.10

Monaco Coach Corp. Mar-09 208.82

Wilton Holdings, Inc. Jul-09 208.00

Norwood Promotional Products Holdings, Inc. May-09 205.00

Gottschalks, Inc. Jan-09 197.07

Cynergy Data, LLC Sep-09 186.18

Tierra Del Sol Resort, Inc. May-09 184.00

Oscient Pharmaceuticals Corp. Jul-09 183.28

Northeast Biofuels, LP Jan-09 174.00

Amtrust Financial Corp. Nov-09 169.50

Cabrini Medical Center Jul-09 167.00

TLC Vision Corp. Dec-09 166.85

Heartland Publications, LLC Dec-09 166.20

American Community Newspapers, LLC Apr-09 151.80

Bigler, LP Oct-09 151.00

Grede Foundries, Inc. Jun-09 148.24 Hallwood Energy, LP Mar-09 145.00 Baseline Oil & Gas Corp. Aug-09 138.91 The Penn Traffic Co. Nov-09 136.87 Aurora Oil & Gas Corp. Jul-09 134.39 Proliance International, Inc. Jul-09 133.50 Contech U.S., LLC Jan-09 131.66 St. Mary's Hospital, Passaic, NJ Mar-09 128.00

Velocity Express Corp. Sep-09 120.60

Jackson Green, LLC Jan-09 120.00

St. Lawrence Homes, Inc. Feb-09 116.38

Saratoga Resources, Inc. Mar-09 110.63

Nova Biosource Fuels, Inc. Mar-09 110.54

Meadowcraft, Inc. Mar-09 110.52 Anchor Blue Retail Group, Inc. May-09 107.61 CIB Marine Bancshares, Inc. Sep-09 107.21 Renaissant Lafayette, LLC Dec-09 106.00 Affiliated Foods Southwest, Inc. May-09 101.50 Jones Stephens Corp. Dec-09 101.00 Dixie Pellets, LLC Sep-09 100.00 Everest Holdings, LLC Aug-09 100.00 Total Liabilities 603,992

a Liabilities > $1 billion per petition.

b Liabilities between $500 million and $1

billion according to petition. Midpoint of range used as estimate.

c Liabilities of $100–500 million, according to petition. Midpoint of range used as

estimate.

Sources: NYU Salomon Center and New Generation Research.


60

Appendix F

Defaults by Industry — 2009


61

Company Industry

155 E. Tropicana, LLC Casino Hotels

Abitibi Bowater, Inc. Paper Mills

Accuride Corp. Motor Vehicle Parts & Accessories

Advanta Capital Trust 1 Personal Credit Institutions

Affinity Group, Inc. Amusement & Recreation Services

Ahern Rentals, Inc. Equipment Rental & Leasing, NEC

Aleris International, Inc. Secondary Smelting & Refining of Nonferrous Mtls

Allis-Chalmers Energy, Inc. Oil, Gas Field Services

American Achievement Group Holding

Corp.

Wholesale-Jewelry, Watches, Precious Stones &

Metals

Anthracite Capital, Inc. Real Estate Investment Trusts

Appleton Papers, Inc. Converted Paper & Paperboard Products

Arantes International, Ltd. Beef Cattle Feedlots

Atlantic Express Transportation Corp. Local & Suburban Transit & Interurban Hwy

Passenger Trains

Aventine Renewable Energy Holdings,

Inc.

Industrial Organic Chemicals

Barrington Broadcasting, LLC Television Broadcasting Stations

Beazer Homes USA, Inc. Operative Builders

Berry Plastics Corp. Plastic Products, NEC

Bonten Media Acquisition Co. Television Broadcasting Stations

Broder Brothers Co. Wholesale-Apparel, Goods & Notions

Buffalo Thunder Development Authority Hotels & Motels

Canwest Media, Inc. Television Broadcasting Stations

Capmark Financial Group, Inc. Finance Services

Caraustar Industries, Inc. Paperboard Mills

Charter Communications Holdings, LLC Cable & Other Pay Television Services

Chemtura Corp. Plastic Material, Synth Resin/Rubber, Cellulos (No

Glass)

Chrysler, LLC Motor Vehicles & Passenger Car Bodies

CIT Group, Inc. Finance Lessors

Citizens Republic Bancorp, Inc. National Commercial Banks

Clear Channel Communications, Inc. Radio Broadcasting Stations

CMP Susquehanna Corp. Radio Broadcasting Stations

Colonial BancGroup, Inc. State Commercial Banks

Commercial Vehicle Group, Inc. Motor Vehicle Parts & Accessories

Cooper-Standard Automotive, Inc. Motor Vehicle Parts & Accessories

Dayton Superior Corp. Steel Pipes & Tubes

Duane Reade, Inc. Drug Stores & Proprietary Stores

E Trade Fianancial Corp. Savings Institution, Federally Chartered

Energy Future Holdings Corp. Electric Services

Energy Partners Ltd. Crude Petroleum & Natural Gas

Energy XXI Gulf Coast, Inc. Crude Petroleum & Natural Gas

Eurofresh, Inc. Agricultural Operations

Extended Stay America, Inc. Hotels & Motels

Fairpoint Communications, Inc. Telephone Communications (No Radiophone)

Finlay Fine Jewelry Corp. Jewelry Stores

Fleetwood Enterprises, Inc. Motor Homes

Fontainebleau Las Vegas Holdings, LLC Hotels & Motels

Ford Motor Co. Motor Vehicles & Passenger Car Bodies

Freescale Semincinductor, Inc. Semiconductors & Related Devices

French Lick Resorts & Casino, LLC Casino Hotels

General Motors Corp. Motor Vehicles & Passenger Car Bodies

Defaults by Industry — 2009 (Continued)

Company Industry

Greentown China Holdings, Ltd. Land Subdividers and Developers, Except

Cemetaries


62

GSI Group, Inc. Miscellaneous Electrical Machinery, Equipment &

Supplies

Haights Cross Communications, Inc. Miscellaneous Publishing

Harrah's Operating Co., Inc. Miscellaneous Amusements & Recreation

Hawaii Superferry, Inc. Ferries

Hawker Beechcraft Acquisition Co., LLC Aircraft & Parts

Hexion U.S. Finance Corp./Hexion

Specialty Chemicals, Inc.

Plastics, Materials, Synth Resins & Nonvulcan

Elastomers

Hollinger Publishing International, Inc. Newspapers: Publishing or Publishing & Printing

Hovnanian Enterprises, Inc. Operative Builders

Idearc, Inc. Miscellaneous Publishing

Indalex Holding Corp. Rolling, Drawing & Extruding of Non-ferrous

Materials

Independencia International S.A. Meat Products

Inn of the Mountain Gods Resort & Casino Miscellaneous Amusements & Recreation

Intelsat Ltd. Communication Services, NEC

Interactive Health, LLC Household Furniture

Ion Media Networks, Inc. Television Broadcasting Stations

Kraton Polymers, LLC Plastics, Materials, Synth Resins & Nonvulcan

Elastomers

Lear Corp. Motor Vehicle Parts & Accessories

Libbey Glass, Inc. Glass, Glassware, Pressed or Blown

Little Traverse Bay Bands Odawa Indians Casino Hotels

Lyondell Chemical Co. Industrial Organic Chemicals

Majestic Holdco, LLC Casino Hotels

Masonite Corp. Lumber & Wood Products (No Furniture)

McClatchy Co. Newspapers: Publishing or Publishing & Printing

Medianews Group, Inc Newspapers: Publishing or Publishing & Printing

Merisant Co. Industrial Organic Chemicals

Metaldyne Corp. Motor Vehicle Parts & Accessories

Milacron Escrow Corp. Special Industry Machinery, NEC

Momentive Performance Materials, Inc. Industrial Organic Chemicals

Muzak, LLC Services - Business Services, NEC

MxEnergy Holdings, Inc.a Natural Gas Distribution

New Asat Finance Ltd. Semiconductors & Related Devices

Newpage Corp. Paper Mills

Nortek, Inc. Electric Housewares & Fans

Nortel Networks Ltd. Telephone & Telegraph Apparatus

Novamerican Steel, Inc. Steel Works, Blastfurnaces & Rolling & Finishing

Mills

NXP B.V. Semiconductors & Related Devices

OSI Restaurant Partners, LLC Retail - Eating Places

Panolam Industries International, Inc. Miscellaneous Furniture & Fixtures

Pliant Corp. Plastics, Foil & Coated Paper Bags

Primus Telecommunication Group, Inc. Telephone Communications (No Radiophone)

R.H. Donnelley Corp. Miscellaneous Publishing

Rathgibson, Inc. Steel Pipes & Tubes

Readers Digest Association, Inc. Books: Publishing or Publishing & Printing

Realogy Corp. Real Estate Agents & Managers (For Others)

Rouse Co. Operators of Non-Residential Buildings

Sabre Holdings Corp. Transportation Services

Samsonite Corp. Leather & Leather Products

Sensata Technologies B.V. Industrial Instruments for Measurment, Display &

Control

Simmons Co. Wood Household Furniture (No Upholstered)


63

Defaults by Industry — 2009 (Continued)

Company Industry

Six Flags, Inc. Miscellaneous Amusements & Recreation

Smurfit-Stone Container Corp. Paperboard Mills

Source Interlink Companies, Inc. Direct Mail & Advertising Services

Spansion, LLC Semiconductors & Related Devices

Spectrum Brands, Inc. Miscellaneous Electrical Machinery,

Equipment & Supplies

Stallion Oilfield Services, Inc. Oil, Gas Field Services

Stanley-Martin Communities, LLC Operative Builders

Station Casinos, Inc. Casino Hotels

Thornburg Mortgage, Inc. Real Estate Investment Trusts

True Temper Sports, Inc. Sporting & Athletic Goods, NEC

U.S. Shipping Partners, LP Water Transportation

Unisys Corp. Computer Integrated Systems Design

USF Corp. (YRC Worldwide, Inc.) Trucking (No Local)

Velocity Express Corp. Air Courier Services

Virgin River Casino Corp. Real Estate Operators

Visteon Corp. Motor Vehicle Parts & Accessories

Vitro SAB de CV Glass Containers

William Lyon Homes, Inc. Operative Builders

Young Broadcasting, Inc. Television Broadcasting Stations



64

Appendix G

2009 Emergences From Default (Dollars in Millions)

Restructured Bonds ($)

First Quarter

Delta Financial Corp. 150

Key Plastics, LLC 115

Kimball Hill, Inc. 203

Sea Containers, Ltd. 272

Total First Quarter $740

Second Quarter

Buffets Holdings, Inc. 300

Constar International, Inc. 395

Hines Horticulture, Inc. 175

Masonite Corp. 770

Motor Coach Industries Int’l, Inc. 152

Source Interlink Companies, Inc. 465

Total Second Quarter $2,257

Third Quarter

Bally Total Fitness Holding Corp. 479

Caraustar Industries, Inc. 219

Energy Partners Ltd. 450

Primus Telecommunications Group, Inc. 366

Propex, Inc. 150

Quebecor World (USA), Inc. 1,453

Spectrum Brands, Inc. 1,033

Tropicana Entertainment, LLC 960

WCI Communities, Inc. 525

Total Third Quarter $5,634

Fourth Quarter 250

ASARCO, LLC 12,811

Charter Communications, Inc. 22,531

CIT Group, Inc. 155

Dayton Superior Corp. 214

Eurofresh, Inc. 1,200

Hayes Lemmerz International, Inc. 2,850

Idearc, Inc. 848

ION Media Networks, Inc. 123

Lazy Days' RV Center, Inc. 1,288

Lear Corp. 750

MagnaChip Semiconductor, LLC 1,788

NTK Holdings, Inc. (Nortek, Inc.) 151

Panolam Industries International, Inc. 650

Pilgrim's Pride Corp. 650

Pliant Corp. 600

SemGroup, LP 2

Silicon Graphics, Inc. 125

True Temper Sports, Inc. 100

US Shipping Partners, LP 250

Total Fourth Quarter $47,086

Total $55,718

Sources: New Generation Research and NYU Salomon Center Defaulted Bonds Database.

FI02J001

Documents

New York University Salomon Center Leonard N. Stern School