Valuing Defaulted Bonds with Recovery Scenarios and Market Comparables

Summary

The document outlines practical approaches to estimating the value of a corporate bond in default. Distressed-debt analysis can consider possible bankruptcy or restructuring recoveries, including cash, replacement debt or equity, and other securities. Those scenarios can help frame a potential value range, but they do not directly determine a fair price because the actual recovery outcome is uncertain.

For a market-based reference, the answer recommends looking at recent trades or broker quotes for bonds from the same issuer and at the same level of the debt structure. It notes that the original coupon and maturity matter less once defaulted than issuer and seniority comparability. A Bloomberg evaluated price may offer a reference when available; if the bond lacks such coverage, the answer cautions that there may be too little peer information to recreate the pricing methodology. These are valuation guides, not a guarantee of an executable price or realized recovery.

Key ideas

• Recovery analysis considers the value of possible cash and securities received through restructuring or bankruptcy.
• Recovery scenarios can inform a range but cannot identify the eventual outcome with certainty.
• Recent prices or quotes for same-issuer bonds at a similar debt tier provide market comparables.
• An evaluated price may be unavailable when there is insufficient information about comparable bonds.

Tags

# Defaulted bonds valuation


# Defaulted bonds valuation












How can I value corporate bonds in default?

I have access to both reuters and bloomberg terminals.

## Answer by Dimitri Vulis (score 1, accepted)

https://quant.stackexchange.com/a/74458

A holder of a defaulted bond expects to receive something of value eventually in the bankruptcy/restructuring process - one or more of maybe some cash, maybe some new debt or equity security, maybe even some derivative, e.g. a right to buy some new security at a discount later.

People who work a lot with distressed debt usually have some tools to analyze what various recovery scenarios might be worth. These estimates to not translate directly into a fair price of a defaulted bond, since no one knows which recovery scenario will be realized, but may provide some guidance for the price range in which the defaulted bond should be trading.

More practically, you just want to know where this bond, or "similar" bonds recently traded or were quoted by brokers. Similiar means defaulted bonds from the same issuer, and in the same debt tier, eg senior unsecured, "pari passou" with your bond. The old coupon and maturity date don't matter anymore. Since you have Bloomberg Terminal, look for a BVAL price for your bond, because BVAL does this. If it's not in BVAL, then there is likely not to be enough information about this bond's peers for you to replicate BVALs methodology.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.