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Creditors Finally Wake Up To An Apocalyptic Reality: Bond Losses As High As 99%

Back in March 2016, we published an article explaining how the coming default cycle – when it finally hits – would be different: it would be marked by record low recovery rates. While there were many reasons for that, three stood out: i) the disconnect between fundamentals and asset prices thanks to the Fed’s constant manipulation of markets, ii) the record layering of debt upon debt, much of it secured, and iii) the years of covenant-lite deals that stripped most if not all creditor protections over the past decade (something which as we noted recently has resulted in bitter creditor fights and a “civil war” involving some of the most prominent names in investing).

Fast forward to today when Bloomberg picks up on what we said almost five years ago, and in “Bond Defaults Deliver 99% Losses in New Era of U.S. Bankruptcies” writes that more and more, bondholders are fighting over recoveries as low as 1 cent. The story should be familiar as we have discussed in constantly in recent months: in a post-covid world, where bankruptcy filings are surging, many lenders are coming to the realization that their claims are almost completely worthless, just as we warned would happen in 2016.

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