FIN-03-008

NYU Stern School of Business

Market Size and Investment Performance of Defaulted Bonds and Bank Loans: 1987-2002

February 2003

Edward I. Altman and Shubin Jha

ABSTRACT

  • The defaulted and distressed, public and private debt markets in the United States increased enormously to a record $942 billion (face value) at the end of 2002. The market value of this increasingly attractive alternative investment segment was approximately $512 billion.
  • Defaulted securities performed below average in 2002; absolute returns, as measured by our various defaulted debt indexes, were - 6.0% on bonds, +3.0% on bank loans, and - 0.5% on the combined defaulted public bonds and private bank loans index. The Altman-NYU Salomon Center Index of Defaulted Bonds grew to a face value of $61.5 billion. The market-to-face value ratio of the Bond Index fell to 0.17 from 0.21 one year ago. The face value of our Defaulted Bank Loan Index was $37.7 billion and the market-to-face value ratio dropped to a record low level of 0.46 by the end of 2002.
  • The recovery rate on defaulted bonds (price just after default) was very low at 25 cents on the dollar; likewise, the weighted average bank loan recovery rate in 2002 dropped to 52 cents on the dollar. With new defaulted bonds rising in 2002 to a record $96.9 billion (default rate of 12.8%) and the default outlook for 2003 high, but lower than for 2002, investment opportunities should abound in the distressed debt market.
  • Indications are that distressed investors (both old and new entities) are successfully raising funds because investor expectations are buoyant.

    Edward I. Altman
    Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
    Telephone: (212) 998-0709
    Email: ealtman@stern.nyu.edu
    Homepage:http://www.stern.nyu.edu/~ealtman

    Shubin Jha
    Institution: Research Associate at the NYU Salomon Center

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