A Simple Approach to Estimate Recovery Rates with APR Violation from Debt Spreads

Haluk Unal, Dilip Madan and Levent Guntay

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: This paper proposes a simple approach to estimate the implied recovery rates embedded in the prices of the debt securities of a firm that differ in priority at time of default. The approach allows for a complex capital structure setting assuming that the absolute priority rule (APR) can be violated. The paper demonstrates that a new statistic, the adjusted relative spread, captures recovery information in debt prices. Model implied recovery rates from corporate bond prices are observed to be consistent with the findings of Altman and Kishore (1996). Interest rates and firm tangible assets are shown to be significant determinants of recovery rates.

Date: 2001-02
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:wop:pennin:01-07

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