What is the probability of each tier of creditor/equity claims being made whole?

In bankruptcy, the broad "tiers" for debt settlement are:

1. Secured debt (going in order of first lien to second lien and so on)

2. Priority unsecured debt

3. General unsecured debt

4. Preferred shareholders

5. Common shareholders

What I'm curious about is what percent of the time for each of these levels that they are made whole in bankruptcy proceedings. Obviously this will change dramatically based on many factors, but any sort of data on this would be interesting to me.

• This does not appear to be a personal finance question. Commented Oct 14, 2023 at 13:01
• It's relevant for deciding the likelihood of getting money when a company you have a bond in defaults Commented Oct 14, 2023 at 14:35

2 Answers

The probability depends on a number of things and the best guides are the credit rating and the recovery curve for the credit rating or company. The quants spend a lot of time building out models for the idiosyncrasies of single companies and groups of companies by credit rating and these will include a default probability and a recovery curve based on it. The recovery curve will tell you what percentage of the value will be recovered by tenor for a given instrument. These curves can be bought and will give you the best view of your expected recovery payout given default.

Taking the probably of default and multiplying by the recovery rate for the tenor you are interested in will give you your expected recovery amount given default.

These curves are mostly used for pricing CDSs which are insurance on the value of an instrument if a particular firm defaults so are available only where there is enough interest by institutional Investors for them to instruct their quants to calculate them.

My general advice for a retail investor is that if you are concerned about default, especially in fixed income markets, you shouldn't be gambling on the bonds. If you really want to invest in securities with a measurably high probability of default then you either want to be prepared to do some heavy maths or pay a lot for default and recovery curves from a reputable quant provider.

I believe the answer depends on how much resource is available versus how much obligation there is at each level, so this really has to be evaluated on a case by case basis. As I understand it each level gets money back only after the higher levels have taken their cut, and if everything is gone before your level is reached you're simply out of luck. And I think direct creditors come before any level of investment/borrowing.