Investors Expect High Recovery When ABS Go Bad

Most investors expect to recover a significant portion of their initial investment in defaulted structured securities, according to rating agency Standard & Poor's.

According to S&P, residential mortgage-backed securities bonds that default are expected to have a principal recovery rate of between 19% and 62%, depending on the year of default. The average cumulative repayment rate, or recovery rate, has not been less than 48.6% for seasoned residential MBS defaults from 1995 to 1998.

Commercial MBS and asset-backed securities have greater variability in recovery rates, the rating agency said. S&P's research on last year's results showed the residential MBS recoveries averaged 60%. The average CMBS recovery rate was 83% last year. However, a large share of the original principal on defaulted CMBS transactions is still at risk, S&P said. The ABS average recovery rate was 45%.

Except in the residential MBS category, recovery rates did not appear to have a relationship with their original ratings.

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