What are default and recovery in lending?

A missed payment is a payment default; breaking a covenant is a technical default. After a default most loans can be made due at once, and lenders may waive the breach, rework the loan or, if it cannot be cured, enforce on the collateral or recover what they can in a restructuring or bankruptcy. How much comes back depends on where the loan ranks and on the collateral behind it: senior, secured loans usually recover more than subordinated ones.

Say a lender is owed $10 million and the borrower defaults. If the business and its assets are sold for enough to repay $6 million, the recovery is 60% and the loss is $4 million. Simple example. Terms vary by fund.

A lender’s loss depends on both how often borrowers default and how much comes back, so investors weigh recovery alongside the default count.