LGD Calculator (Loss Given Default)

LGD = (EAD - Recovery) / EAD = 1 - Recovery Rate. It is the percentage of the exposure that a lender expects to lose when a borrower defaults. Together with PD (probability of default) and EAD (exposure at default), it determines Expected Loss:

Expected Loss = PD × LGD × EAD

A loan with 5% PD and 40% LGD on $1M exposure has expected annual loss of 0.05 × 0.40 × 1,000,000 = $20,000.

The components in detail.

• EAD: the dollar amount the lender expects to be exposed to at the moment of default. For a term loan, often the outstanding balance. For a revolving credit, EAD includes drawn + a portion of undrawn (the credit conversion factor).
• Recovery: cash collected post-default through collateral sale, guarantor payments, restructuring, or bankruptcy distributions.
• LGD: complement of recovery rate (1 - RR).

Typical LGD values by loan type.

• Senior secured loans (real estate collateral): 25-45% LGD
• Senior unsecured corporate debt: 50-65% LGD
• Subordinated debt: 70-85% LGD
• Senior unsecured claims on corporates, Basel foundation-IRB supervisory value: 45% LGD (75% for subordinated claims)
• Credit cards: 70-90% LGD (no collateral)
• Sovereign bonds in emerging markets: 30-60% LGD (highly variable)
• Auto loans: 40-55% LGD (used vehicle resale recovers part)
• Mortgages (US): 20-30% LGD in normal markets, can spike to 40-50% in housing downturns

Why LGD varies so widely.

• Collateral type: real estate sells slowly but holds value; equipment depreciates fast.
• Seniority: senior creditors get paid first in bankruptcy.
• Jurisdiction: US Chapter 11 has higher recovery than emerging-market bankruptcy systems.
• Time to recovery: longer recovery periods mean more discounting in NPV terms.
• Economic cycle: LGD is correlated with PD, and both spike in recessions. This is the part that catches people out. The collateral is worth least exactly when the most borrowers are defaulting, so the two risks arrive together rather than averaging each other out.

Two LGD definitions.

1. Workout LGD: measures the actual loss including all costs (legal, time value of money, administrative). Discounted to default date.
2. Market LGD: uses the bond’s trading price 30 days after default as the recovery proxy. Easier to compute but noisier.

Regulators (Basel) require workout LGD; some practitioners use market LGD for benchmarking.

Time discounting in workout LGD. Recoveries take time, and a dollar collected three years after default is not a dollar. Recover $600,000 on a $1,000,000 default after 3 years, discounted at 10%, and the present value is $600,000 / 1.10³ = $450,789. Effective LGD = (1,000,000 − 450,789) / 1,000,000 = 54.9%, not the headline 40%. The discount rate should reflect the lender’s cost of capital while the workout drags on.

Worked example. A senior secured term loan of $5,000,000 defaults. Recoveries total $3,000,000 (collateral sale plus a guarantor payment), legal and admin costs come to $300,000, the money arrives on average 1.5 years after default, and the workout is discounted at 8%. Those are exactly the five numbers the calculator asks for.

• Present value of the recovery: $3,000,000 / 1.08^1.5 = $2,672,918
• Net of workout costs: $2,672,918 − $300,000 = $2,372,918
• Loss: $5,000,000 − $2,372,918 = $2,627,082
• Workout LGD = 2,627,082 / 5,000,000 = 52.54%

The headline figure, ignoring both the delay and the costs, is (5,000,000 − 3,000,000) / 5,000,000 = 40%. The gap between 40% and 52.5% is entirely time and legal bills, and it is the reason regulators insist on the discounted number.

One simplification worth knowing about: the calculator applies a single average time to the whole recovery. A real workout collects in instalments, and discounting each one on its own date gives a slightly different answer. If your tranches are far apart in time, weight them by size to get the average you enter here.

Why LGD matters for capital. Basel III risk-weighted assets = EAD × LGD × Risk Weight. A loan with 25% LGD requires roughly half the regulatory capital of a loan with 50% LGD, all else equal. Banks have strong incentives to push LGD down through better collateral, guarantees, and structuring.