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Enron Mail |
Mark, this is a good point. In Moody's June 1999 study, Debt Recoveries for
Corporate Bankruptcies, there is a graph of Firm-Level Recovery Rates by Year of Bankruptcy Resolution (as opposed to default year). Reading from the graph finds: As the data above is based on resolution year, the same study finds the average length of time spent in bankruptcy is 1.30 years (median 1.15 years and standard deviation of 1.20 years). The interesting point is the slide in recovery value 1996 to 1998. One would wonder if the mix of high-yield issuance slanted towards the tech companies would yield lower recoveries (quick technological obsolescence--little tangible recovery value). Interesting to note is the December 1999 to December 2000 change in spreads. The table below divides the December 2000 spreads by the December 1999 spreads. One would have expected a pronounced flight to safety over this time-frame, but the figures are more mixed: To: Michael Tribolet/Corp/Enron@ENRON, William S Bradford/HOU/ECT@ECT, David Gorte/HOU/ECT@ECT, Vince J Kaminski/HOU/ECT@ECT cc: Subject: Re: Default rates Per our discussion, see attached for impact of assumed recovery rates: Michael Tribolet@ENRON 12/11/2000 08:09 AM To: William S Bradford/HOU/ECT@ECT, David Gorte/HOU/ECT@ECT, Vince J Kaminski/HOU/ECT@ECT, Mark Ruane/HOU/ECT@ECT cc: Subject: Default rates Please see below for my note to Jeremy at the bottom and his reponse. I have placed Mark Ruane's yields against a mid November default frequency table. Note there may be a slight shearing in dates, but the concept is more important: Market implied cumulative default rates (%): 1 year 5 year 10 year AAA 0.51 5.74 14.54 AA 0.67 6.39 16.61 A 0.98 8.98 21.03 BBB 1.17 9.88 22.39 BB 3.27 18.62 37.51 B 4.65 24.21 46.27 S&P Historical default rates (%): 1 year 5 year 10 year AAA 0.00 0.13 0.67 AA 0.01 0.33 0.90 A 0.04 0.47 1.48 BBB 0.21 1.81 3.63 BB 0.91 8.82 14.42 B 5.16 20.95 27.13 In looking at the One-Year transition rates as a very rough proxy for how many more defaults occur in a recession (1991) versus average (1981-1999) historical default rates (%): Investment grade Non-Investment grade Avg. 1981-99 0.07 4.21 1991 0.12 10.40 Multiple 1.7x 2.5x Looking at where the market implied default rates divided by the historicals default rates to obtain a "multiple" (how much more severe than historical): 1 year 5 year 10 year AAA infinite 44.2x 21.7x AA 67.0x 19.4x 18.5x A 24.5x 19.1x 14.2x BBB 5.6x 5.5x 6.2x BB 3.6x 2.1x 2.6x B 1.1x 1.2x 1.7x On the 10 year historical figures, we need to be careful as the S&P static pool figures show a definite seasoning (lower defaults in late years probably due to prepayment) versus our contracts. Secondly, the S&P figures have Withdrawn ratings, which usually mean they are stale, but loosing some information content. I will ask Emy to set up a meeting to discuss further. ---------------------- Forwarded by Michael Tribolet/Corp/Enron on 12/11/2000 07:06 AM --------------------------- From: Jeremy Blachman@EES on 12/10/2000 07:21 AM To: Michael Tribolet/Corp/Enron@Enron cc: Subject: Default rates Thanks. I would STRONGLY suggest an offsite sooner than later with a handful of the right people so that we can step back and design the right architecture for looking at credit in our deals. It is broken, not clear, killing our velocity and true capabilities. We also need to look at staffing, skills sets, the credit reserve model etc. Perhaps you should take a crack at an agenda. ---------------------- Forwarded by Jeremy Blachman/HOU/EES on 12/10/2000 07:08 AM --------------------------- Michael Tribolet@ENRON 12/09/2000 03:51 PM To: Jeremy Blachman/HOU/EES@EES cc: Subject: Default rates I visited with Vince Kaminski for about 20 minutes today regarding the market implied defaults rates and the disconnect in investment grade land. He is seeing the same anomaly and agreed that we as a company need to revisit the methodology employed in calculating the implied figures. I will follow through and report back.
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