Share of exposure permanently lost when a debtor defaults, the complement of the recovery rate, and a variable that worsens precisely when defaults multiply.
A default does not mean total loss: a senior secured bondholder often recovers a large share of par, a subordinated creditor almost nothing. Loss given default measures what does not come back, and it is one minus the recovery rate. Three drivers govern it. Rank in the capital structure first, which explains most of the dispersion, secured debt recovering markedly better than subordinated debt. Sector next, a reusable industrial asset liquidating better than an intangible one. And the point in the cycle last, which is the most important and most often forgotten: recovery rates fall when defaults pile up, because assets are liquidated into a market where everyone is selling. That correlation between probability of default and loss given default is why a credit model treating the two as independent badly understates tail loss, even when each of its two parameters taken alone is correctly calibrated.
Private credit portfolio of 900M EUR on an insurer's balance sheet as of December 31, 2025. A recession scenario taking the annual default rate from 1.2% to 4.5% and the recovery rate from 65% to 40% does not multiply loss by 3.75 but by more than six: expected loss moves from 3.8M to 24.3M EUR, and the gap comes from both parameters deteriorating at once.
LGD, loss given default, taux de recouvrement, recovery rate, sévérité du défaut