Recovery Ratings

Fitch has a longstanding approach to the recovery ratings it uses to notch its rating of instruments from Issuer Default Ratings.

For issuers with an IDR of BB- and above, a generic approach is taken to the recovery prospects of different classes of debt, on the basis that at these rating levels there is significant scope for the capital structure to change before default.

For companies rated B+ or below, a bespoke recovery analysis is performed. This is a three-step process which involves estimating the value that will be available to creditors on a restructuring or winding up, more often than not the entity’s going concern enterprise value; estimating creditor mass on restructuring, and the seniority of different levels of debt; then distributing the amount available to creditors among the different claimants based on seniority. The resulting recovery percentages are translated into recovery ratings, which are used to determine instrument ratings.