Press Release

Kamakura: Corporate Credit Quality Improves during April
Kamakura Troubled Company Index Improves to the 69th Percentile

NEW YORK, May 2, 2018: The Kamakura Troubled Company Index ended April at 9.25%, a decrease of 1.14% from the end of March. The index reflects the percentage of 39,000 public firms with a default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

Default probabilities declined across the board for the first time this year. At the close of April, the percentage of companies with a default probability between 1% and 5% was 7.56%—a decrease of 0.83% over the previous month. The percentage with a default probability between 5% and 10% was 1.18%, a decrease of 0.18%. Those with a default probability between 10% and 20% amounted to 0.43% of the total, down 0.08%, and those with a default probability of over 20% amounted to 0.08%, down 0.05% from last month. Volatility remained high during the month, with the index ranging from 9.25% on April 30 to 11.36% on April 2. For the year the index has ranged from 7.00% on January 15 to 15.19% on February 8.



At 9.25%, the troubled company index is at the 69th percentile of historical credit quality as measured since 1990. Among the ten riskiest-rated firms listed in April six are from the United States, with one each from Australia, Canada, Indonesia and Great Britain. Windstream Holdings Inc., (NASDAQ: WIN) was the riskiest rated global company with a one-year Kamakura Default Probability (KDP) of 39.91%. In April, there was 1 default in Kamakura’s coverage universe.



The Kamakura expected cumulative default curve for all rated companies world-wide steepened with the 1-year declining by 0.20% and the 10-year increasing by 0.05% to 12.82%.

Commentary
By Martin Zorn, President and Chief Operating Officer, Kamakura Corporation

“The improvement in the Kamakura Troubled Company Index was largely driven by macro variables over the month especially in the case of the riskiest sector of the index. More specifically the VIX fell 19.6% which was its biggest monthly decline since November 2016. Oil continued to increase with most analysts believing that the rally in prices likely has more to do with higher demand as opposed to supply levels. The combination of positive economic factors and less volatile markets contributed to lower KDPs. Among the ten riskiest global firms one-year KDPs improved for eight of them.

The Expected Cumulative Default Curve is of much greater interest in my opinion. This predictor of expected future defaults steepened over the month with the short end coming down 20 basis points while the long end increased by 5 basis points. Focusing on the 10-year expected cumulative default rate we find that the telecommunications sector is the riskiest sector while health care is the safest. In fact, the expected cumulative default rate for telecom is three times higher than it is for health care.

Over the full KRIS database long run default prediction is most aided by these time-zero variables: industry sector, macro-economic environment and measures of financial leverage. A factor such as the 3-month volatility of the stock price is important at short term horizons but is not important when looking ten years ahead. In order to measure and manage your risk, you need to do these things well: measure default risk in the context of a specific time horizon and understand the drivers of potential default.”

About the Troubled Company Index
The Kamakura troubled company index measures the percentage of 39,000 public firms in 68 countries that have an annualized one- month default risk of over one percent. The average index value since January, 1990 is 14.50%. Since November, 2015, the Kamakura index has used the annualized one-month default probability produced by the KRIS version 6.0 Jarrow-Chava reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors.

The KRIS version 6.0 models were developed using a data base of more than 2.2 million observations and more than 2,600 corporate failures. A complete technical guide, including full model test results and parameters, is provided to subscribers. The KRIS service also includes a wide array of other default probability models that can be seamlessly loaded into Kamakura’s state-of-the-art enterprise risk management software engine, the Kamakura Risk Manager. Available models include the non-public-firm default model, the commercial real estate model, the U.S. bank model, and the sovereign model. Related data includes credit default swap trading volume by reference name, market implied credit spreads, and prices on all traded corporate bonds traded in the U.S. market. Macro factor parameter subscriptions include Heath, Jarrow, and Morton term structure models for government securities in the U.S., Germany, the UK, Canada, Spain, Sweden, Australia, Japan, Thailand, and Singapore. All parameters are derived in a no-arbitrage manner consistent with seminal papers by Heath, Jarrow, and Morton, as well as Amin and Jarrow. A KRIS Macro Factor Scenario Service subscription includes both risk-neutral and “real world” empirical scenarios for interest rates and macro factors.

The version 6.0 model was estimated over the period from 1990 to May 2014 and includes the insights of the entirety of the recent credit crisis. The 69 countries currently covered by the index are: Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kuwait, Luxembourg, Malaysia, Malta, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the UK, the U.S., and Vietnam.

To follow the troubled company index and other risk commentary by Kamakura on a daily basis, please follow:

Kamakura CEO Dr. Donald van Deventer (www.twitter.com/dvandeventer)
Kamakura President Martin Zorn (www.twitter.com/riskmgrhi) and
Kamakura’s official twitter account (www.twitter.com/KamakuraCo).

About Kamakura Corporation

Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing, and software. Kamakura was named to the World Finance 100 by the editor and readers of World Finance magazine in 2016 and 2012. In 2010, Kamakura was the only vendor to win two Credit Magazine innovation awards. Kamakura Risk Manager, first sold commercially in 1993 and now in version 10.0.3, is the first enterprise risk management system for users focused on credit risk, asset and liability management, market risk, stress testing, liquidity risk, counterparty credit risk, and capital allocation from a single software solution. The KRIS public firm default service was launched in 2002. The KRIS sovereign default service, the world’s first, was launched in 2008, and the KRIS non-public firm default service was offered beginning in 2011. Kamakura added its U.S. Bank default probability service in 2014.

Kamakura has served more than 330 clients with assets ranging in size from $1.5 billion to $3.0 trillion. Its risk management products are currently used in 47 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, Ukraine, South Africa, Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam, and many other countries in Asia, Europe and the Middle East.

For more information, please contact:
Kamakura Corporation
2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815
Telephone: 1-808-791-9888
Facsimile: 1-808-791-9898
Information: info@kamakuraco.com
Web site: www.kamakuraco.com