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

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.