Recovery Rates are used to estimate the residual values expected from assets fallen into bankruptcy.

Recovery Rates are know to vary according to the type of asset involved (Loans, bank facilities, Bonds)
seniority class and rating.

Every Recovery Rate and Volatility pair is assigned an identifier or Rank.

Financial-Risk-Manager allows you to define multiple Recovery Groups and classes.

There is however only one Recovery Group active per Simulation.
This is not a limitation, as you can define as many Rating classes as you need.


Risksvr™ orders and assigns Recoveries to Parties or Obligors through Rank Order. This mechanism
allows substitution and comparison between Recovery Group that might have a variety of Ranking orders (see below).


Recovery Format

The Recovery volatility rates and volatilities are defined in percent.

Recovery Expected Mean values above 1. [100%] are converted to an absolute percentage term. For example if you input 10, then 0.1 is assumed.

The Recovery Volatility values above 1. [100%] are converted to an absolute percentage term. This means that if
you enter a volatility of 8 it will be transformed into a decimal value of 0.08.

A Recovery group can contain as many recoveries as you see fit.

Some research assume recoveries are defined by seniority, while other are
define by Rating Ranks. Others might include Ratings and Seniority, or even Geography or even industry.

Financial-Risk-Manager allows you to define any type of recovery rank thanks to Recovery Templates..

The Recovery Template allows you to organize Recoveries according to different assumptions. It is however important to understand recoveries are connected to obligors, counterparties or directly to assets through their Recovery Rank.

This means that if you decide to switch between one template and another, the engine will always connect the Counterparty, Obligors or Asset to its Recovery Rank (also called the Recovery "Class"').


Recovery Groups and Organization


Recovery Groups might include as many recovery classes as you deem fit.
In most cases, you will probably decide to settle for either one of the standard templates that are predefined in the Credit module.

Seniority and Collateral / Legal status.

1. Senior Secured.
2. Senior Unsecured.
3. Senior Subordinated.
4. ...
5. Junior Subordinated.

or

Rating Rank and Seniority

1. AAA Senior .
2. AAA Junior.
3. AA  Senior.
4. AA Junior.
5. A ..
6. ...

 

To create a new Recovery classes and ranking system, clikc the Create New Template button on the toolbar.

When you create a brand new Recovery Mechanism, bear in mind Parties, Accounts or Obligors will refer to the Recovery through their Recovery Rank / Rank Order, even if a Label is displayed with a different name and Rank Mechanism.

For example, Assume you assign a Recovery from the Active Group that is Ordered through Seniority and Secured and that is labeled Junior Secured and has Rank Order Three (3). If you then create a Recovery Group Ordered by, say, Rating, the Engine will assume the Party, Account or Obligor is referring to the Recovery with the Third Rank order declared in the Recovery DataSource.

If this is, say, the 3rd item (it should have a Rank order of Three), then the 3rd Rank Order item will be also used when you apply another Recovery Group.

This is why it is essential you maintain rank consistency between Recovery Templates

 

Recovery Rate Control

Beyond the Recovery Rates and Volatilities that are fed to the engine, you can define how the engine will simulates Recovery Rates with:

• Recovery Control.
• Recovery distribution

Recovery Control allows you to:

1. Disable Recovery Rates. i.e. Set the Recovery rate to 0 so that losses are 100%.
2. Enable Recovery Rates but disable volatility. i.e. Fix the Recovery Rate to the Mean Recovery Rate and the Recovery Volatility to 0.
3. Enable both Recovery Mean and Recovery Volatility.

How to define Recovery Control

1. Open the Analysis / Setup Screen.
   • If you are in the Main Trading Board, click on Setup button in the center of the page.
   • If you are in another module. Click on Risk-Analysis in the upper toolbar or menu.
2. In the Setup / Risk Analysis screen, click on the Default Loss tab.
3. In the Default Loss tab, select the Recovery Control listbox.
   
   
   
   From this you can choose:
   • Disable Recovery. This sets the Recovery Rate to 0, regardless of the Recovery Data fed to the engine.
     The engine will therefore assume nothing can be recovered from the bankruptcy proceedings. This is the most conservative approach.
   • Recovery Mean No volatility. This takes the mean recovery rate provided in the Recovery DataSource and ignores Recovery Volatility that was provided in the Recovery DataSource.
     Recovery is therefore determined by the mean recovery rate only.
     
   • Stochastic Recovery. This takes both mean recovery rate and volatility provided in the Recovery DataSource and computes the Recovery Rate from Stochastic Simulation.
     
     The Distribution used for stochastic simulation is currently defined in the Recovery DataSource.
     
     If no specific Distribution is defined, the Log-Normal distribution is applied.
     
     The Engine Currently supports the following Recovery Rate distribution assumptions.
     
     • Log-Normal (default)
     • Normal.
     • Gamma.
     • T.
     • Pareto.

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