A decrease in first-lien term loan recoveries, driven by the pandemic, has begun to reverse, with 2021 ultimate recoveries reverting back to historical levels, according to a new Fitch Ratings report.

“The coronavirus pandemic, resulting EBITDA pressures and a trend toward encumbering an increasing share of enterprise or asset value with first-lien debt, prior to filing, helped drive down recoveries in 2020,” said Judah Gross, Senior Director at Fitch.

The average recovery rate in 2020 was 67 percent, and the median was 80 percent. Valuations were heavily pressured by the pandemic-induced market volatility, uncertainty and recession. Forty-three percent of claims were in the energy; retail; gaming, lodging and restaurant; or leisure sectors, all of which faced significant stress in 2020. Average first-lien term loan recoveries for these sectors were materially below the 2020 and overall dataset averages.

An 85 percent average ultimate recovery for the 2021 filers suggests a return to historical levels as U.S. corporate distress subsided last year. Several 2021 filers still subject to the bankruptcy process, with first-lien term loans not yet included in our dataset, are expected to see recoveries in the 91–100 percent range. The 2021 sample size is limited given that bankruptcy filing volume has also dwindled in 2021.

Historically, first-lien term loan recoveries have been strong with 52 percent of claims obtaining ultimate recoveries of 91?100 percent. The average recovery rate is 76 percent, and the median is 96 percent across all first-lien term loans in Fitch’s bankruptcy case study dataset spanning 2002-2021.

Recoveries on second-lien debt claims were only marginally higher than unsecured notes. The average second-lien ultimate recovery was 39 percent and 38 percent of the cohort recovered 10 percent or less. There was a similarly wide dispersion around the 35 percent average unsecured note recovery. Roughly 42 percent of unsecured note claims recovered 10 percent or less, but 22 percent recovered 71 percent or more of the claim amount.

For more information, a special report titled “U.S. Leveraged Finance Restructuring Series: Ultimate Recovery Rate Study” is available on the Fitch Ratings’ website at www.fitchratings.com.