Global Recovery Rate

Abstract

An obligor’s global recovery rate (GRR) represents the proportion of its facilities that is expected to be recovered in case of default. It is usually expressed as a percentage of the exposure at default (EAD) and can also be expressed by its complement 1 — the loss given default (LGD). Given the importance of the GRR parameter (or the LGD) for a bank’s risk-based decision-making, the quality of its estimation can produce a significant competitive advantage. Bank loans’ estimated recovery rates are usually based on the discounted value of future expected recovery cash flows (this methodology is commonly known as workout LGD).¹ It is important to understand that expected recoveries do not take into account facilities’ regular reimbursement and interest payments, but only the cash flows collected following the obligor’s default, irrespectively of their timing.²