How low can recovery rates go? Today the CDS auction on Tribune’s defaulted bonds settled at 1.5 cents on the dollar, which is low but in line with expectations of bondholders essentially getting nothing once the secured creditors have been paid.
Much more startling is the price on the senior secured loans: just 23.75 cents on the dollar. I checked in with Nishul Saperia at Markit, and he said that it was the lowest recovery rate he’d ever seen for a secured loan; historically, such debt would recover at 70 to 90 cents on the dollar if it ever defaulted.
A lot of the problem is that Tribune is a mess of a company, and it’s going to take a lot of time and money to liquidate the assets which will ultimately be used to pay off the loanholders. Plus, of course, the fact that most of the loans were extended during the boom years when covenants and other creditor protections had a habit of disappearing for little if any reason.
I should imagine that today’s news has been greeted with a shudder at the Chicago Tribune, the LA Times, and other Tribune properties: clearly no one on Wall Street thinks they’re worth much even without the huge pile of debt that Sam Zell loaded onto their fragile shoulders. Is David Geffen still interested in buying an uneconomic trophy property? He could turn out to be many employees’ final hope.