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
• Bank loans (corporate, average): 35% LGD (Basel default)
• 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 — both spike in recessions.

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. A workout that recovers $600 on a $1M default after 3 years at 10% discount rate has present value $451. Effective LGD = (1,000 - 451) / 1,000 = 55%, not the headline 40%. The discount rate should reflect the lender’s cost of capital during the workout.

Worked example. A senior secured term loan of $5M defaults. Workout takes 18 months. Recoveries:

• Collateral sale: $2.5M (after 12 months)
• Guarantor payment: $0.5M (after 18 months)
• Legal and admin costs: $0.3M
• Discount rate: 8%

Present value of recoveries:

• Collateral: 2.5M / 1.08 = $2.31M
• Guarantor: 0.5M / 1.08^1.5 = $0.45M
• Total PV recovery: 2.31 + 0.45 - 0.30 = $2.46M
• Workout LGD = (5.0 - 2.46) / 5.0 = 50.8%

A non-discounted “headline” LGD would be (5.0 - 2.7) / 5.0 = 46%. The discounted figure is the regulatory standard.

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.