Recovery Rate
Private Credit glossary · Portfolio Management, Monitoring & Workouts
Definition
Percentage of exposure-at-default recovered on a defaulted loan after the workout. Long-run averages by seniority: first-lien middle-market sim 65%–75%, second-lien sim 30%–45%, senior unsecured / mezzanine sim 15%–25%. Recovery is the complement of LGD: Recovery = 1 - LGD, and feeds the realized-loss identity Loss = EAD × (1 - Recovery).
Recovery Rate in plain English
When someone borrows money and then can't pay it all back, the lender doesn't automatically lose everything. The "recovery rate" is the slice of the money they DO manage to claw back, usually by selling whatever the borrower pledged as backup (like a house or equipment) once the mess is sorted out. Think of lending a friend $100 who then goes broke, but you get to keep their $70 bike as collateral, that's a 70% recovery rate. It matters because two loans of the same size can lose very different amounts: a loan first in line to be repaid ("first-lien") recovers a lot, while one at the back of the line recovers little, and your actual loss is simply the exposure times the part you did NOT recover.
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