A Simple Approach to Estimate Recovery Rates with APR Violation from Debt Spreads
AbstractThis 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.
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 01-07.
Date of creation: Feb 2001
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