Tendered Debt Trading Below Recovery Value

Marriet · October 3rd, 2008, 11:52 am

I am working with an EM country and I have realized that the longer bond (2033) is trading USD 5 below recovery value (30%). In fact, the country I am working with has untendered debt too, and bond I have mentioned is trading even below untendered. Usually I applied the cumulative default probability to get the theoretical value; according to this metric the bond is expensive at current market prices. Does anyone have a possible explanation for this?????Ill really appreciate any comment.Enjoy

Paul · October 3rd, 2008, 12:57 pm

Where do you get the recovery value from?P

Marriet · October 3rd, 2008, 1:04 pm

Market usually assumes 30% of RV for this credit, which is consistent with its previous default. Perhaps, investors are expecting to receive a higher haircut if the issuer defaults again. That this makes sense????

BullBear · October 4th, 2008, 10:30 am

QuoteOriginally posted by: MarrietMarket usually assumes 30% of RV for this credit, which is consistent with its previous default. Perhaps, investors are expecting to receive a higher haircut if the issuer defaults again. That this makes sense????Clearly the market is not assuming 30% anymore. Past events do not guarantee similar future events!

MarianoArrieta · October 6th, 2008, 3:41 pm

Currently this issuer is in a restructuring process and so far the haircut for the untendered debt remains unknown. According to the market prices, investors are pricing a recovery rate of 30%. On the other hand the credit market has been moving the recovery value lower to 25%. Clearly, the market is not extrapolating pass events. Or the untendered debt is too expensive or the tendered too cheap.