Recovery Rate
Definition
Recovery rate is the percentage of a defaulted loan or note exposure ultimately recovered after enforcement, collateral liquidation, restructurings, guarantees, and costs.
Why it matters
Recovery rate is the second half of credit performance. A platform can have a tolerable default rate if recoveries are high and timely, but weak recoveries turn modest defaults into large realized losses. Recovery timing also matters because late recoveries reduce IRR even if principal is eventually returned.
Common misconceptions
- •Recovery rate should be net of costs, not just gross sale proceeds.
- •Ultimate recovery and time-weighted investor return are not the same.
- •Collateral type, lien priority, and legal process drive recovery more than headline coupon.
Technical details
Gross vs net recovery
Gross recovery is total cash collected from collateral or borrower resolution.
Net recovery subtracts legal fees, servicing costs, property taxes, repairs, insurance, broker commissions, and other sale costs.
Investor recovery should be measured after the platform waterfall and fees.