Page 423 - Special Topic Session (STS) - Volume 3

STS552 Natalia Nehrebecka
the VaR value is definitely lower for the Dowturn Recovery Rate than for the
Through-the-Cycle Recovery Rate. The LGD estimate was also compared
during the economic slowdown proposed by the US central bank and
estimated by quantile regression. It can be concluded that Dowturn LGD,
calculated as a linear transformation of the average LGD value, is
overestimated for low LGD values and underestimated for high LGD values. In
summary, the loss calculated due to default in the period of downturn does
not catch unexpected risks caused by the bimodal distribution of LGD.

Figure 2: Downturn effects on Recovery Rates quantiles

Source: Authors’ calculations

It was observed economic sector effects manly in first quartile (Figure 3).
The affiliation may cause a variation up 15 percentage points with lowest
Recovery Rate for trade sector (section G) and highest values for real states
(section L) as well as energy sectors (section D, E). In contrast, the OLS results
are misleading, because the trade sector is not significant. It seems to be the
safest economic activity from the creditor perspective of the obligor’s
repayments. Companies belonging to industries with a high level of
concentration and specialization in the event of becoming insolvent may have
problems with the sale of their own production assets due to a low liquid
market. Undoubtedly, this would have a negative impact on the position of
creditors not only by reducing the amount of recovered amounts, but also by
postponing the time of their collection. In addition, it is worth noting that if
the assets of an insolvent enterprise are so specific that they are not suitable
for use in another industry, then the difficulties with their sale at the time of
insolvency may increase the poor condition of the enterprise sector.

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