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Lenders predict US debt recovery rates to remain low this year

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More than half (57 per cent) of US lenders expect that the recovery rates on defaulted senior secured debt will remain below historical norms in the year ahead, according to a new survey.

FTI Consulting’s 2024 Leveraged Loan Market Survey also found that US-based lenders are cautiously optimistic about the economy in the year ahead, with 45 per cent of respondents stating that the probability of a US recession is minor. This compares to 29 per cent who believed there was only a minor risk of recession last year.

“It’s encouraging to see more optimism in this year’s survey, but the expectation of ongoing low recovery rates likely starts to affect behaviour both before and after filings,” said David Katz, a senior managing director in the senior lender advisory practice within the corporate finance and restructuring segment at FTI Consulting.

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“It’s clear, formidable challenges remain before the economy and markets are truly free to run.”

66 per cent of non-bank lenders said that they expect recovery rates to be lower than usual this year, compared with 53 per cent of bank lenders.

Almost half (46 per cent) of respondents said that high interest rates represent the most underestimated risk by financial markets in 2024, while two-thirds of respondents (67 per cent) said that inflation will remain above the Fed’s target by the end of the year.

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“Last year began with a lot of pessimism about the impacts of high inflation and monetary tightening, but it ended with many convinced that inflation had been tamed, a recession had been averted and earnings growth was set to resume,” said Chuck Carroll, senior managing director and leader of FTI’s senior lender advisory practice.

“The findings in this year’s survey point to more tempered enthusiasm, with the continuation of high interest rates and lingering economic uncertainties lowering respondents’ expectations for 2024.”

The survey also found that ESG considerations are becoming less important to lenders, with 41 per cent of respondents saying that ESG factors minimally impact their lending decisions, if at all, compared to 27 per cent last year.

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