Credit · Core
Recovery Rate
Recovery is what a claim is worth after default, as a fraction of par — the complement of loss given default.
Definition
Recovery is measured at default or at emergence, on a specific lien. Senior secured recoveries cluster higher than unsecured. CDS assumes a fixed recovery (often 40) in the quote; reality is a distribution.
Why it matters
Spread and expected loss need LGD. A 40 recovery assumption on a thin unsecured claim is a fiction.
Case
Lehman senior unsecured recoveries were far below the 40 used in many CDS calculators. The quote convention was not the workout.
How to read it
Lien, collateral, and jurisdiction. Pair PD with a recovery that matches the claim you own.
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