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S&P: Defaulted Securities Can Receive Cash Flow

NEW YORK CITY-Unlike a typical defaulted security such as a corporate bond, a defaulted structured finance security supported by the cash flow of the underlying assets may receive cash flow from both interest and principal. And the cash flow can be substantial, says a new S&P report.

By John Howe | Updated on September 05, 2001

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.

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