S&P: Defaulted Securities Can Receive Cash Flow

NEW YORK CITY-Standard and Poor’s, the securities rating agency based here, assigns a default rating to a security if it misses so much as a dollar of scheduled interest payments or if it suffers a loss at the transaction level that fully erodes protection for the security and causes a principal loss. In either case, credit surveillance is halted and the security is forever after unable to cure its default.

Nonetheless, a defaulted structured finance security that is supported by the cash flow of the underlying assets, may receive cash flow from both interest and principal, according to a new S&P report, “Life After Death: Recoveries of Structured Finance Securities,” by Joseph Hu. And, unlike a typical defaulted security such as a corporate bond, he writes that the cash flow is often substantial.