How does recovery analysis work for a HY bond, and what recovery rates are typical?

Estimate what creditors recover in default as a percentage of par.

1. Estimate distressed enterprise value or liquidation value.
2. Adjust for administrative claims, priority claims, and collateral value.
3. Run value through the capital structure waterfall.
4. Calculate recovery by tranche.

• First-lien secured: high recovery, often 65-80%+
• Second-lien: medium recovery, often 30-50%
• Senior unsecured: lower recovery, often 25-40%
• Subordinated: lowest recovery, often 5-20%

Asset-heavy businesses usually recover better than asset-light businesses. Jurisdiction and restructuring regime matter.

Spread compensation should be assessed against both default probability and expected recovery.