Expected Loss (EL)
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Definition
Probability-weighted expected credit loss: EL = PD × LGD × EAD. Realized credit loss is computed as Loss = EAD × (1 - Recovery Rate). For US middle-market direct senior secured loans, long-run averages are PD ≈ 2–3%, recovery ≈ 70%, giving an annualized expected loss of roughly 60–90 bps — comparable to broadly-syndicated leveraged loans despite the smaller borrower base.
Expected Loss (EL) in plain English
Expected loss is a lender's best guess of how much money it will lose on a loan on average, found by multiplying three things: how likely the borrower is to default (PD), how much is actually lost if they do (LGD), and how big the loan is at that moment (EAD). It's the same logic as an insurance company pricing a policy — chance of a claim, times size of a typical claim — so it can charge enough to cover normal losses. For these mid-sized US business loans, defaults run about 2–3% a year and lenders usually recover about 70% of the money, which nets out to losing only around 60–90 cents per $100 lent each year. That's surprisingly low, and about the same as loans to much larger companies.
Also called: EL
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