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February 2012

Accounting for Troubled Debt Restructurings by Debtors

Deleveraging During Turbulent Times

The global economic downturn has presented significant challenges to many debt-laden companies seeking to meet interest and principal payments on a timely basis, satisfy existing loan covenants, and otherwise deleverage to adapt to changing circumstances. Though the significant growth in loan modifications related to residential mortgages has captured the most media attention, lenders have also experienced increased activity in workouts and restructurings of commercial real estate. For corporate borrowers, Fitch Ratings reports that default rates on high-yield bonds reached 6.8% in 2008 and peaked at 13.7% in 2009 as companies struggled to survive during turbulent times. These rates decreased to 1.3% in 2010 and 1.5% for 2011, and Fitch's forecast for 2012 is that high-yield default rates will rise, to a range of 2.5% to 3.0%. Many companies have opted for more conservative leverage ratios and sought to rebalance their capital structures, leading to a greater volume of loan modifications and restructurings.

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