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The recovery rate of a bond, or similar type of security such as DevDosh Ltd’s fixed income investment product, is the amount of the total bond value that will be recouped should the debtor default. The value of the bond is calculated by adding the face value of the bond to the total coupon payments expected until bond redemption.

For instance should an investor put £100,000.00 into a 5 year corporate bond paying a 2% coupon the value of the bond would be £100,000.00 face value + £10,000.00 coupon payments (over 5 years) = a total bond value £110,000.00.

Once you know the bond value you can go about calculating the recovery rate. The bond recovery rate is the percentage of the total bond value that will be realised should the issuer default. Another equally important metric when considering loss of bond value on default is called Loss Given Default (LGD). The LGD is the percentage of the total bond value that will be lost should the issuer default.

Therefore should a bond with a total bond value of £100,000.00 default with a recovery rate of 30% the LGD will be 70%. In real terms this would dictate a £30,000.00 recovery figure and a £70,000.00 loss figure.

Recovery rates vary significantly between bond classifications and bond issuer. The main issues that effect recovery rates of corporate bonds and debt investment instruments in general including the DevDosh Ltd fixed income investment product are listed below;

  • Level of security : Bond recovery rates are directly proportionate to the level of seniority of the bond. You can read about bond security seniority at DevDosh Ltd : Best Bonds for Default Payout. The Federal Reserve Bank of Kansas City completed a study of bond recovery rates and found the following to be true. Senior secured bonds have a recovery rate of 56%, senior unsecured bonds have a recovery rate of 37%, subordinate bonds have a recovery rate of 31% and junior bonds have a recovery rate of 27%. It is clear that bonds with a higher level of debt security have a higher recovery rate.
  • Macroeconomic Conditions : General macroeconomic conditions will dictate a landscape which will influence the performance of bonds. For instance the larger economic cycle maybe in recession driving up default rates and reducing liquidity. A prime example of this was the great financial crisis of 2008/09.
  • Issuer Specific : Individual corporate factors will have an effect on recovery rate also. The level of company debt, the level of equity and their capital structure will all have resounding effects on their corporate bond recovery rate. The metric to watch out for is the company debt to asset ratio. Put simply the more assets the company has to sell, the more likely the debt holder is to recover the total bond value.

Debt is without doubt one of the most risk averse asset classes available to investors. However not all debt is created equal and for that reason investors must be aware of exactly what risk profile they are buying into.

DevDosh Ltd scores extremely well in comparison to the snapshot of bullet points above.

  • DevDosh Ltd Level of security : DevDosh Ltd security is a 1st charge real estate development mortgage with a minimum 20% equity. This is the most senior form of debt collateral.
  • DevDosh Ltd Macroeconomic Conditions : The property schemes final gross development values are calculated using macroeconomic forecasts to accurately determine the developments value upon project completion. This is a 18-24 months from loan issuance at most. A maximum loan of 80% GDV can then be offered. This loan to value ration provides a healthy discount margin facilitating speedy disposal should repossession action be necessary.
  • DevDosh Ltd Issuer Specific : The individual corporate factors effecting the DevDosh Ltd fixed income investment product are that the investors best interests are ring fenced and protected in a special purpose vehicle designed specifically to ensure that investors are paid expediently and in full.

If you are an investor interested in making market beating yields for you fixed income investment capital, contact DevDosh Ltd today.