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Europe scores surprisingly well on leveraged loan recoveries

Recoveries in Europe for distressed junior lenders compare well with the US despite the lack of a single bankruptcy framework.

In July rating agency Moody’s published its first detailed analysis of recoveries in European private equity-backed leveraged loans. The research sheds some light on what has traditionally been a fairly opaque topic.

The fact that so many of these loans are collateral for rated CLOs has enabled the agency to derive sufficient data for the study – which before this downturn would have been limited to simply analysing the trading prices of individual defaulted debt instruments. So the figures could provide ammunition for the debate as to whether some form of Chapter 11-style regime is needed in the region.

At first glance the answer would seem to be no. Despite the lack of a single bankruptcy jurisdiction in Europe (and the perceived lower emphasis on the rights of creditors together with glacial legal processes that erode enterprise value) the results were surprisingly good: average recovery of 71% in Europe compared with 75% in the US.

However, a closer look reveals that those perceptions are clearly strongly held, as only two companies out of the 53 in the study resorted to the local bankruptcy courts – both French. Unlike in the US, the vast majority of European restructurings are settled out of court.

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