Return on Bonds in Bankruptcy

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Will 17 years ago

In a typical corporate Chapter 11 bankruptcy, how many pennies on a dollar does a typical corporate bondholder get? The answer could be a range (e.g., 10% to 20%). I know the common shareholders typically get wiped out, but it would be interesting to know how much better the bondholders fare.

I assume any percentage answer to the question above is a percent of the bond's face value. So if the bonds are trading prior to bankruptcy at 15% of the face value, and the bondholders recover 20% of the face value, then you effectively have a profit on the principal portion of the bond. (I'm sure it rarely works out so well, but it was an example to facilitate the conversation.)

Finally, how long is it typically before the bond holders see any money back after Chapter 11 is declared, on average? I'm sure some bankruptcies go three years before there is any settlement, but what is more typical?

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Elle 17 years ago

I think the following study possesses some specifics, but I am not yet sure I am reading it correctly:

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see Exhibit 4 for starters, in particular the default prices. Earlier it says the numbers are percent of face value. Note the study does not include non-financial companies. I would be interested to see if you read Exhibit 4 the way I am reading it. Some references appear at the end that might be worth checking, too, like "Recovery Rates on Defaulted Corporate Bonds and Preferred Stocks, 1982-2003, December 2003 (80272)." If forced to bet, I'd bet that the percent paid is highly variable, since it depends on the bankrupt company's assets after paying off certain higher rated debts, and the assets remaining can be a large or small fraction of what is owed bondholders.

Otherwise, I think the best one will turn up quickly is commentary like that at

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honda.lioness 17 years ago

"Elle" wrote

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Maybe see Exhibit 4 for starters. Table 6 near the end of

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numbers that seem consistent with the above link. From1983-1998, investors in bonds of U.S. non-financialcompanies that defaulted recovered on average 42%. For U.S.banks, the figure is 22%.

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Return on Bonds in Bankruptcy

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