Kamakura Reports Slight Decline in Corporate Credit Quality in February
Kamakura Troubled Company Index Increases 0.12% to 8.54%
NEW YORK, March 1, 2017: Kamakura Corporation reported Wednesday that the Kamakura troubled company index ended February at 8.54%, an increase of 0.12% from the end of January. The index reflects the percentage of the Kamakura 38,000 public firm universe that has a default probability over 1.00%. An increase in the index reflects declining credit quality while a decrease reflects improving credit quality.
As of the end of February, the percentage of the global corporate universe with default probabilities between 1% and 5% was 6.96%, an increase of 0.08% from the prior month; the percentage of the universe with default probabilities between 5% and 10% was 1.11%, an increase of 0.02% from the prior month; the percentage between 10% and 20% was 0.37%, up 0.01%; while the percentage of companies with default probabilities over 20% was 0.10%, an increase of 0.01% from the previous month. The index ranged from 8.22% on February 10 to 8.54% on February 28. Volatility was at one of the lowest levels since tracking began.
At 8.54%, the troubled company index was at the 78th percentile of historical credit quality (with 100 being best all time) over the period from January 1990 to the present. Among the ten riskiest rated firms in February, six were from the United States, and one each from Great Britain, Greece, Portugal and Spain. This represented a shift from prior months. During the month, there were eleven defaults in the coverage universe. Vanguard Natural Resources (VNRSQ: OTC) last month’s riskiest firm filed for Chapter 11 bankruptcy protection on February 2, 2017. Gulfmark Offshore Inc. (NYSE:GLF) became the riskiest rated firm with a one year KDP of 19.81%
The failure rate among firms in the top 10 of the 2,580 rated public firms has been very high, as summarized in the following chart:
In subsequent updates of the troubled company index, the actual number of failures will be compared with the expected number of failures and the probabilities of occurrence for each of the 0 through 10 possible number of failures.
Martin Zorn, President and Chief Operating Officer for Kamakura Corporation, said Wednesday, “Markets proved to be interesting in February with the focus on whether the Federal Reserve will really increase rates in March. Early in the month, the market did not believe the Fed would increase rates and we saw a flattening of the curve as the reflation trade began to unwind. We ended the month with momentum building for an increase. Europe is beginning to feel more optimistic although much of the optimism is being translated through soft survey data. The increase in European names in the ten riskiest list at this point seems to represent company specific rather than macroeconomic drivers. The emerging markets continue to experience a great deal of uncertainty. The big question from a risk standpoint is how will global central banks unwind their extraordinary monetary actions and what impact will that have on interest rates, spreads, economic conditions, credit risk and ultimately on portfolio values and risk.”
The Kamakura troubled company index measures the percentage of 38,000 public firms in 68 countries that have annualized 1 month default risk over one percent. The average index value since January, 1990 is 14.77%. Beginning in 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 is provided to subscribers which includes full model test results and parameters. 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 Kamakura Risk Manager. Models available 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 United States market. Macro factor parameter subscriptions include Heath, Jarrow and Morton term structure models for government securities in the United States, Germany, the United Kingdom, Canada, Spain, Sweden, Australia, Japan, Thailand and Singapore. All parameters are derived in a no arbitrage manner consistent with the seminal papers by Heath, Jarrow and Morton and 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, which includes the insights of the entirety of the recent credit crisis. The 68 countries currently covered by the index are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, 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 United Kingdom, the United States, and Viet Nam.
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)
Kamakura Principal Risk Officer Suresh Sankaran (www.twitter.com/sureshkamakura)
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 2012 and 2016. In 2010, Kamakura was the only vendor to win 2 Credit Magazine innovation awards. Kamakura Risk Manager, first sold commercially in 1993 and now in version 8.1, is the first enterprise risk management system with 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 ranging in size from $1.5 billion to $1.6 trillion in assets. Kamakura’s risk management products are currently used in 43 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, the Ukraine, Eastern Europe, the Middle East, Africa, South America, Australia, Japan, China, Korea, India and many other countries in Asia.
Kamakura has world-wide alliances with Fiserv (www.fiserv.com) and SCSK Corporation (http://www.scsk.jp/index_en.html) making Kamakura products available in almost every major city around the globe.
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Web site: www.kamakuraco.com