Predicting the Cure of a Defaulted Company : Nonlinear Relationships between Loan-Related Variables And the Cure Probability

The potential cure of a defaulted company affects the estimation of the loss given default (LGD), as specific LGD values are associated with defaulted and subsequently cured companies. This study estimates the probability of defaulted company being cured on the basis of data from a large international sample of defaulted companies. In particular, this study examines which of the characteristics of a defaulted company and its loan might help predict whether that company is likely to be cured or not. The results of the present analysis provide clear empirical evidence that the relationship between the probability of cure and the total volume of the loan is U-shaped. The results also show that the probability of cure linearly decreases in the drawn percentage in the lender limit and that the probability of cure increases if the outstanding amount is either almost completely collateralized or not collateralized