How this calculator works
Loss given default is the share of an exposure that a lender expects to lose if a borrower fails to pay. It is the complement of the recovery rate, so the two always add to 100%. A recovery rate of 40% means lenders expect to get back 40 cents on the dollar through collateral, guarantees, restructuring or resale, leaving a loss of 60 cents. Multiplying the rate by the exposure gives the expected loss amount if default happens. In credit models, expected loss is often estimated as probability of default times loss given default times exposure at default; this page supplies the second and third factors.
Formula
LGD = 1 - recovery rate. Recovery rate = 1 - LGD. Loss amount = exposure at default x LGD. Recovery amount = exposure at default x recovery rate.
Worked example
An exposure of $1,000,000 with a 40% recovery rate has a loss given default of 60%. The expected loss amount is $600,000 and the expected recovery is $400,000.
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Frequently asked questions
Is loss severity the same as LGD?
Yes. Loss severity and loss given default both describe the fraction of the exposure lost, and both equal 1 minus the recovery rate.
Why can recovery rates differ between loans?
Collateral quality, seniority, jurisdiction and the cost and time of enforcement all matter. A secured senior loan usually recovers more than an unsecured subordinated bond.
Does this include the cost of delay?
No. A simple LGD ignores the time value of money while a default is worked out. Analysts sometimes discount recoveries, which lowers the recovery rate and raises LGD.