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Q&A

• Why does Stamdata not include “Buybacks below par” as default events?

  Stamdata has initially chosen not to include “buybacks below par” as a default (e.g. I.M Skaugen with shadow rating of CCC, March 2015) as they are thought to be a controversial default definition. It is ultimately a question of timing. Most companies who choose to do buybacks either through auctions or in the secondary market, will at some time have to reshuffle their debt through some form of debt exchange that will be classified as a default.

• “Compensated Monetary Loss” is not considered to be a default, what would qualify as such an event?

  Stamdata’s definition rests on the assumption that a distressed exchange will have to be “at inferior terms” to the original agreement. Typically companies will rollover debt with extended maturities on the same terms but with a compensation in the form of cash/higher coupon etc. The increase in duration is then mitigated by the compensation given. There are however some situations that are not as straightforward and were Stamdata will have to do a judgment. An example is I.M Skaugen where an extended maturity of 1.4 years was given (and a reverse Dutch buyback offer) with a compensation of a 2% consent fee. The timing of the offer to the bondholders coupled with the inability of the issuer to repay the bond with available cash at the time made it a difficult case. Stamdata decided ultimately on a compensated monetary loss based on the fact that the inability to refinance had more to do with the closed primary market rather than I.M. Skaugen being close to bankruptcy or in severe distress. However, if there was no compensation included in the amendment, the event would be marked as a default.

• What is an “Ultimate” recovery?
  

  There are two ways one could measure a recovery rate of a distressed bond. The first method uses post-default secondary trading prices. This method will give a snapshot of the fair value an investor could receive if one were to offload the bonds in the market post default event. In other words, the secondary trading prices gives an idea of the perceive recovery rate given bankruptcy.

  The second method is ultimate recovery rates where one is interested in looking at the fair value an investor receives when a solution/conclusion to the default event emerges. The solution can be everything from a debt-to-equity swap, write off debt or other solutions that remedy the long term financial situation of the company. It could also be a bankruptcy or voluntary liquidation where assets are sold to retrieve recovery. Rather than looking at what a recovery potentially could be, Stamdata Ultimate recovery rates measure the fair value of the actual solution/conclusion.

• What is the difference between nominal, discounted and final recovery?
  

  Each default will have a nominal recovery rate giving a snapshot of the fair value of each event. Discounted recovery is the discounted fair value of each event using the interest rate since last coupon payment date (this to be able to compare recovery rates across different time periods). Final recovery is the (nominal) fair value of each bond from issue date to maturity/solution , in other words the total recovery of each bond given that an investor holds the bond to maturity/solution.

• Why are recovery rates not calculated on all default events?
  

  Each default event will not have a calculated recovery before the bond is considered as cured or there is an exit to the event. This means that recovery rates will only be calculated for an exit or new/exit credit event. The reasoning for this is that if the default event is not an instant cure, it will most likely forth come more default events within a short time period. Second, recovery rates in an exit or new/ exit event will most likely take time (often several years) before the ultimate recovery is available. The recovery rate will therefore be set to interim and calculated on an ongoing basis if data is available (trading prices, settlements or liquidation of assets). Ex. Petromena ASA experienced a liquidation (exit) process in May 2009. Several payments were made in the latter years but the final payment from the liquidation process was first made in March 2016 which gave it an ultimate recovery.