The OP's own answer is:
OK, it seems that the issue was Jpeg compression. I have been having lots of issues with Lightroom recently including losing settings and it had reverted to what I presume is the default quality setting.
Recovering overexposed pixels...
My addition to the original question, which was:
How to restore areas of background lost from flash overexposure?
... is that if the image is overexposed, you can almost certainly not recover the detail.
If a set of nearby pixels are each individually recorded as pure white, then if you reduce the exposure in post-processing, they will all come down at the same time, to a light grey, then a mid grey, etc. The problem is that there is no distinction from one pixel to the next - therefore there is no way to create contrast between pixels - that is, there is no way to render detail. You just have one solid block of monotonous pixels.
Preventing Lightroom from losing its settings...
Regarding your own answer, you wrote that Lightroom recently lost settings. This happened to me at least twice, on Windows 7 and appears to have been related to Windows performing an update. Incredibly frustrating. In one case lost all my Windows user profile info, including all my processed images. In both cases, lost all my watermarks. There is, however, an option to move your Lightroom settings out of your Windows or Mac user profile into another location that the operating system shouldn't really touch - hopefully preventing the loss of Lightroom configuration in future.