LGD Calculator – Loss Given Default
Calculate the Loss Given Default (LGD) to measure the potential loss if a borrower defaults. LGD represents the portion of the exposure that is not recovered after default, expressed as a percentage.
Loss Information
LGD Results
Loss Given Default (LGD):
0.00%
Recovery Rate:
0.00%
Expected Loss:
$0
Risk Assessment
Loss Severity:
N/A
Recovery Quality:
N/A
Credit Risk Level:
N/A
Portfolio Impact
Capital Requirement:
$0
Risk-Adjusted Return:
N/A
Pricing Impact:
N/A
Understanding Loss Given Default (LGD)
Loss Given Default (LGD) measures the potential loss a lender or investor faces when a borrower defaults on a loan or debt obligation. It represents the portion of the exposure that cannot be recovered through liquidation, restructuring, or other recovery processes.
LGD Formula
Basic Formula
- LGD = (EAD - Recovery Amount) / EAD
- EAD = Exposure at Default
- Recovery Amount = Amount recovered
- Expressed as a percentage
Example Calculation
- EAD: $100,000
- Recovery: $60,000
- LGD: ($100,000 - $60,000) / $100,000 = 40%
- 40% loss on default
LGD Interpretation
LGD Ranges and Recovery Quality
Understanding different loss severity levels
Low Loss (0-30%)
- Excellent recovery
- Strong collateral
- Efficient workout process
- Low credit risk
Moderate Loss (30-60%)
- Fair recovery
- Adequate collateral
- Standard workout process
- Moderate credit risk
High Loss (60-90%)
- Poor recovery
- Weak collateral
- Complex workout process
- High credit risk
Very High Loss (90%+)
- Minimal recovery
- Little or no collateral
- Difficult or impossible recovery
- Very high credit risk
Factors Affecting LGD
| Factor | Impact on LGD | Reason |
|---|---|---|
| Collateral Quality | Higher quality ? Lower LGD | Better recovery value |
| Seniority | Higher seniority ? Lower LGD | Priority in recovery waterfall |
| Economic Conditions | Recession ? Higher LGD | Lower asset values, delayed recovery |
| Workout Process | Efficient process ? Lower LGD | Faster recovery, higher proceeds |
LGD in Risk Models
Expected Loss Calculation
- EL = PD × LGD × EAD
- PD = Probability of Default
- LGD = Loss Given Default
- EAD = Exposure at Default
Regulatory Capital
- Basel Accords requirements
- Risk-weighted assets
- Economic capital
- Stress testing
Recovery Rate vs LGD
Recovery Rate
- Recovery Amount / EAD
- Percentage recovered
- Higher is better
- Complements LGD
LGD
- 1 - Recovery Rate
- Percentage lost
- Lower is better
- Risk measure
Industry LGD Benchmarks
Corporate Bonds
- Investment grade: 20-40%
- High yield: 40-70%
- Senior secured: 15-30%
- Subordinated: 60-90%
Bank Loans
- Senior secured: 10-25%
- Senior unsecured: 30-50%
- Subordinated: 50-80%
- DIP financing: 5-15%
LGD Estimation Methods
Historical Analysis
- Actual recovery data
- Loss experience
- Industry benchmarks
- Time series analysis
Market-Based Approaches
- Credit spreads
- Asset swap spreads
- Equity volatility
- Structural models
Applications in Finance
Risk Management
- Portfolio risk assessment
- Credit risk modeling
- Economic capital allocation
- Stress testing
Pricing and Valuation
- Risk-adjusted pricing
- Credit spread determination
- Expected loss provisioning
- Fair value calculations
Key Takeaways for LGD Calculator
- LGD = (Exposure at Default - Recovery Amount) / Exposure at Default measures the loss percentage in case of default
- LGD is a key component in expected loss calculations along with PD (Probability of Default) and EAD (Exposure at Default)
- Lower LGD indicates better recovery prospects and lower credit risk
- LGD varies by asset class, collateral quality, and seniority in the capital structure
- The calculator helps assess potential losses and determine appropriate risk premiums
- LGD is used in regulatory capital calculations and risk-weighted asset determinations
- Recovery rate = 1 - LGD shows the percentage that can be recovered after default
- Use the calculator to evaluate credit risk and make informed lending or investment decisions