Standard & Poor’s Ratings Services today announced the extension of its recovery rating scale for secured bank loans for the Canadian market.

The scale was launched in December 2003 for U.S. secured bank loans. It indicates the range of expected loss or recovery that an investor can expect in the event of default by an issuer.

Effective today, Standard & Poor’s will assign the new recovery ratings to new secured loans that it rates, along with its existing bank loan rating.

“The Canadian launch of Standard & Poor’s Recovery Ratings is a natural extension of the product for Canadian issuers, given the integration of the Canadian and U.S. bank markets,” stated Thomas Connell, managing director and office head of Standard & Poor’s Toronto office, in a news release.

“We also believe that the launch of recovery ratings will help to stimulate an active secondary market in Canada, which has been almost nonexistent to date,” he added.

The new scale is not linked to Standard & Poor’s Corporate Credit Ratings, which focus on the likelihood of default in timely payment. Instead, the Recovery Rating estimates the likely recovery of principal in the event of default.

The will use a numerical scale with ‘1+’ and ‘1’, the two highest ratings, denoting different levels of likelihood that an issue will fully recover principal in the event of default. Ratings below that level, ranging from ‘2’ through ‘5’, denote varying levels of expected principal recovery, from just below 100% down through negligible recovery levels.

Standard & Poor’s expects that loan-specific recovery rates will become increasingly important for both lenders and borrowers as the syndicated bank loan market expands to include more institutional investors and the ability to isolate default risk and expected loss given default becomes a major issue for bank asset quality.