Press Release

Kamakura: Corporate Credit Quality Improves in July
Kamakura Troubled Company Index Recovers to the 71st Percentile

NEW YORK, August 2, 2018: The Kamakura Troubled Company Index ended July at 9.10%, a decrease of 0.59% from the prior month. The index reflects the percentage of 39,000 public firms that have a default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the close of July, the percentage of companies with a default probability between 1% and 5% was 7.49%—a decrease of 0.42% over the previous month. The percentage with a default probability between 5% and 10% was 1.18%, a decrease of 0.05%. Those with a default probability between 10% and 20% amounted to 0.37% of the total, down 0.08%, and those with a default probability of over 20% amounted to 0.06%, down 0.04% from a month earlier. Volatility moderated, with the index ranging from 9.01% on July 10 to 9.88% on July 3. For the year, the index has ranged from 7.00% on January 15 to 15.19% on February 8.



At 9.10%, the troubled company index now sits at the 71st percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in July, five are from the United States, with one each in Australia, Great Britain, Greece, Hong Kong, and the Netherlands. The list is more geographically diverse than we have experienced in some time. Altice completed the separation of Altice USA on June 12 and the group changed its name to Altice Europe NV. Despite this action, Altice Europe NV (AMS: ATCB) continued to be the riskiest global company, with a one-year Kamakura Default Probability (KDP) of 38.44%. In July, four companies in Kamakura’s coverage universe experienced default, two in the United States and one each in Japan and China. Two were energy companies.


The Kamakura expected cumulative default curve for all rated companies worldwide narrowed slightly, with the one-year default probability decreasing by 0.01% to 0.72% and the 10-year declining by 0.04% to 12.50%.


 

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

Market and macroeconomic factors accounted for the bulk of movement in default probabilities across our coverage universe last month. While we continue to see weakness in the retail and energy sectors, we are seeing other sectors with increasing risk as well as the geographic footprint among the riskiest firms on our list broaden.

U.S. economic news has been positive. With higher default probabilities emerging globally, let’s take a closer look at the macroeconomic data more broadly.

Small business sentiment in Canada declined last month, with optimism falling the most it has done since 2011.

In Britain, households have become net borrowers for the first time since 1988. Studies of economic indicators since the Brexit referendum show business activity, investment sentiment, consumption, and trade either flat or down. The only thing that has risen there is prices.

On the continent, the balance sheet of the European Central Bank (ECB) measured as a percent of GDP is expected to be at 40% this year, compared to 15% prior to the credit crisis. Increased leverage among central banks globally will limit their flexibility in the event of a downturn and introduce market disruptions if their unwinding strategies are not carefully executed.

In China, the renminbi continued to fall. Though It does not appear that the government has been trying to intervene. Instead, the People’s Bank of China is implementing a liquidity injection similar to that of the ECB’s targeted longer-term financing operations (TLTRO), according to a recent Bloomberg article. The goal is to free up more lending rather than use interbank liquidity to offset any cyclical downturn in the Chinese economy (especially in manufacturing).

We expect to see short-term risk remain low and well-managed, with defaults generally being company-specific. Rising interest rates in the U.S. should be carefully monitored, especially with respect to leveraged firms in industries undergoing fundamental change or subject to above-average volatility. Given the longer-term risk indicated by the expected cumulative default data, risk managers should be actively stress-testing longer-dated exposures while staying abreast of macroeconomic trends and disruptions.

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 14.46%. 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 2017, 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.

To follow 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).

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