Loan Recovery Rates: What Lenders Get Back When Borrowers Default

Last reviewed on June 12, 2026.

Default rates tell you how often borrowers fail; recovery rates tell you how much lenders get back when they do. For CLO analysis, recovery is half of the loss equation: Net Loss Rate = Default Rate × (1 − Recovery Rate). This page collects the key recovery rate data by lien position, collateral, measurement method, and time period — and explains why recent recoveries have fallen below their long-term averages.

How Recovery Rates Are Measured

Two conventions dominate, and they produce different numbers — always check which one a study uses:

Ultimate recoveries usually exceed trading-price recoveries because distressed prices embed uncertainty, forced selling, and the time value of a workout. CLO managers who can hold defaulted loans through a restructuring often realize more than the post-default market price.

Recovery Rates by Lien Position and Debt Type

Seniority and security are the dominant drivers of recovery. Long-term averages across rating-agency studies (1987-2024):

Sources: Moody's Ultimate Recovery Database and annual default studies; S&P Global Ratings recovery studies. Figures are long-run averages; individual outcomes vary widely.

Why First-Lien Recoveries Are Falling

The most important recent development in recovery data: expected first-lien recoveries have declined meaningfully below their historical average. Moody's has estimated expected ultimate recoveries on US first-lien loans at roughly 68%, versus long-run historical experience in the high 70s. Four structural forces explain the decline:

• Loan-heavy capital structures: Many speculative-grade borrowers now finance themselves almost entirely with first-lien debt ("loan-only" structures). With little junior debt beneath them to absorb losses, first-lien lenders recover less when the enterprise value falls short.
• Covenant-lite documentation: With ~90-95% of broadly syndicated loans lacking maintenance covenants, lenders intervene later in a borrower's deterioration, when less value remains. See Loan Covenants & Cov-Lite.
• Liability management exercises (LMEs): Aggressive out-of-court restructurings — drop-down financings, uptiering exchanges — can strip collateral or subordinate existing lenders, producing recoveries well below traditional bankruptcy outcomes for non-participating lenders.
• Asset-light borrowers: More leveraged borrowers are software and services companies whose value lies in intangibles, which can evaporate in distress faster than hard assets.

Recovery Rates by Collateral and Sector

Within first-lien loans, the nature of the borrower's assets drives dispersion around the average:

Indicative ranges synthesized from rating-agency sector recovery studies; individual outcomes depend on capital structure and cycle timing.

Recovery Rates Through the Cycle

Recoveries are countercyclical to defaults: they fall exactly when defaults spike, because distressed assets are sold into weak markets. This correlation matters for CLO loss modeling.

How Rating Agencies Model Recoveries in CLOs

When agencies rate CLO tranches, they do not assume historical-average recoveries. They haircut recoveries based on the rating stress being tested — the higher the target rating, the more punitive the assumption:

• AAA stress scenarios typically assume first-lien recoveries of roughly 45-60%, far below the ~70-80% historical experience.
• S&P recovery ratings assign each loan a recovery rating (1+ through 6) mapping to expected recovery bands (e.g., a "2" implies 70-90% recovery), which feed the CLO model at stressed values.
• Moody's applies recovery assumptions that vary by instrument type and country, combined with default probability stresses well above historical rates.

This double conservatism — stressed default rates and stressed recovery rates — is a core reason AAA CLO tranches have never defaulted through the GFC, the energy bust, and COVID.

Worked Example: Recovery's Impact on CLO Losses

Consider a $500M CLO portfolio experiencing a severe 8% annual default rate:

Even doubling the loss rate in this stress scenario leaves losses far below the 35-40% subordination protecting AAA tranches — but it materially changes CLO equity returns, where every dollar of loss lands first.

Frequently Asked Questions

What is the average recovery rate on defaulted leveraged loans?

Roughly 70-80% on an ultimate recovery basis for first-lien loans over the long run, with recent expected recoveries closer to 60-70%. Trading-price measures run 10-15 points lower.

Are recovery rates falling in 2025-2026?

Expected first-lien recoveries have declined below historical averages, driven by loan-only capital structures, covenant-lite documentation, and liability management exercises that can subordinate non-participating lenders. Moody's has put expected first-lien recoveries near 68% versus high-70s historical experience.

What recovery rate should I assume for CLO analysis?

For base-case modeling, 60-70% on first-lien collateral is a defensible current assumption; rating agencies use 45-60% in AAA stress scenarios. Always pair the recovery assumption with a consistent default measure (payment defaults vs. defaults including distressed exchanges).

How do recovery rates affect each CLO tranche?

Recoveries determine how much of each default becomes a realized loss. Losses hit equity first, then climb the capital stack. Higher recoveries are the main reason CLOs (backed by secured loans) outperformed mortgage CDOs (backed by assets recovering 20-40%) — see CLO vs CDO.

Related Pages

• CLO & Leveraged Loan Default Rates — the other half of the loss equation
• CLO Historical Returns — performance by tranche and vintage
• Loan Covenants & Cov-Lite — how documentation affects recoveries
• Broadly Syndicated Loans — the collateral being recovered
• CLO Credit Risk — how defaults and recoveries flow through the structure