Recent defaults lead to record credit derivatives payouts
CDS auctions have yielded historically low recovery rates this year, meaning swap sellers have had to pay more than normal
Auctions to settle credit default swaps this year have led to the lowest average recovery rates since records began in 2005, as Covid-19 bears down on distressed companies and leaves swap sellers on the hook for larger payouts.
The recovery rate, decided by the auction, reflects the expected value of a company’s cheapest-to-deliver bonds, making the CDS payout the difference between that price and the par value of 100. In other words, the lower the recovery rate, the higher the payout on the
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