Because defaults in ABS tend to be relatively recent, there is still a lot of uncertainty about the recovery characteristics, Standard & Poor's said in new study titled "Recovery Proxies for Defaulted U.S. Structured Finance Securities."

But for defaulted RMBS, where the remaining balance at risk is not as large, a recovery range is evident, said Erkan Erturk, an S&P analyst who worked on the study.

On average, defaulted RMBS has a cumulative principal repayment rate (represented as a percentage of original principal) between 19% and 62% and a principal realized loss rate of 6% to 59%, depending on the year of default, the study found.

The average cumulative repayment rate has not been less than 48.6% for seasoned RMBS defaults from 1995 through 1998. Average principal repayment is in the range of 50% to 60% for RMBS defaults in that same time period.

Erturk said the study adds transparency to the behavior of defaulted structured securities - which can be particularly helpful for structuring CDOs.

"There has not been much research on recoveries for structured finance. There has been a lot of research on the corporate side, but in structured finance, it's quite new," Erturk said. "We still have a lot of unknowns, but this is an attempt to tell the marketplace what we know so far. We realize that we still need to wait longer to really understand the recovery characteristics."

This is S&P's third and most ambitious analysis of defaults, including 267 deals (130 RMBS, 35 CMBS and 102 ABS), compared with last year's sample of 157. Only deals with available cash-flow data are included in the study, so the sample size does not represent the total number of defaults that occurred in each sector.

While in the previous studies recoveries did not appear to have a relationship with their original ratings, Erturk said the additional data and analysis in this study pointed to a strong relationship. Higher ratings, on average, tended to be associated with lower realized losses and higher principal repayments.

On average, defaulted RMBS have an expected recovery value of more than 96% for AAA' securities and 70% for AA' securities.

CMBS defaults originally rated BBB' experienced an average principal repayment rate of 16.1% during the study period. Average realized principal loss rates were 1.5% for BBB' securities, 6.1% for BB' and 14.5% for B.' However, more than 80% of the original principal is still at risk in this sector, creating a large range for ultimate recovery values.

Current cumulative loss rates have been substantial in the ABS sector, the study said. The average principal loss rate is 34% for BBB' securities, 52% for BB' and 34% for B.'

Defaulted ABS originally rated AAA' experienced a high rate of principal repayment at 64%. But interest recovery rates on ABS have been mixed because of the high number of recent defaults, the study found.

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