Recovery From Distressed Debt Swaps Beats Bankruptcy, Fitch Says | Company Business News-OxBig News Network

(Bloomberg) — Distressed debt exchanges have been delivering better average outcomes for lenders compared to bankruptcies, according to a Fitch Ratings report. 

Such swaps have yielded an average recoveries of between 77.8% and 92.8%, according to Fitch, which analyzed transactions from 2024 through the first quarter. 

That compares with an average recovery of bankruptcies of 39% so far this year, and 50.7% in 2024, Fitch said.

While the ratio of bankruptcies to DDEs hovered at around one-to-one from 2021 through 2023, bankruptcies made up only 18% of defaults last year.

DDEs make up 85% of loan default volume, an increase from 74% in 2024, and have overtaken bankruptcies as the dominant type of default in recent years, the report shows. 

This trend has been fueled by liability management exercises, which made up about a third of all DDEs. These allow companies to skirt a larger restructuring that comes with a bankruptcy filing, strip apart good and bad assets and move creditors along with senior secured financing into a new box.

“This sizable gap reflects that companies entering DDEs typically have more enterprise value,” Fitch said in its report. “Companies proceeding to bankruptcy face additional restructuring time, leverage and costs that further erode creditor recoveries.”

But the recovery rate is lower for LMEs than for other types of distressed debt swaps. The outcome gap between participating and non-participating lenders is greater as trading levels for loans held by the latter lenders are higher than typical post-bankruptcy recoveries, according to Fitch. 

Issuers taking part in DDEs rarely see “meaningful and lasting improvement in their credit risk” and don’t necessarily result in having lower leverage. 

Among 13 companies that went through DDEs in the first quarter, only one — Sinclair Television Group Inc. — achieved a rating above the CCC rung following its exchange, according to Fitch. 

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