Press Release

Kamakura: Corporate Credit Quality Improves in May
Kamakura Troubled Company Index Improves to 72nd Percentile

NEW YORK, June 4, 2018: The Kamakura Troubled Company Index ended May at 8.92%, a decrease of 0.33% from April. 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.

Default probabilities declined in all categories except among companies with the highest level of risk. At the close of May, the percentage of companies with a default probability between 1% and 5% was 7.32%—a decrease of 0.24% over the previous month. The percentage with a default probability between 5% and 10% was 1.16%, a decrease of 0.02%. Those with a default probability between 10% and 20% amounted to 0.36% of the total, down 0.07%, and those with a default probability of over 20% amounted to 0.08%, the same as last month. Volatility was muted, with the index ranging from 8% on May 10 to 9.29% on May 29. For the year, the index has ranged from 7.00% on January 15 to 15.19% on February 8.

At 8.92%, the troubled company index now sits at the 72nd percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in May, six are from the United States, with one each from Australia, Canada, Great Britain, and the Netherlands. Altice NV (AMS: ATC) was the riskiest global company, with a one-year Kamakura Default Probability (KDP) of 35.29%. Altice, a Netherlands-based multinational telecommunications company in the process of restructuring, has experienced significant equity volatility. In May, five companies in Kamakura’s coverage universe experienced default, three of them in the UK.

The Kamakura expected cumulative default curve for all rated companies worldwide steepened slightly, with the one-year default probability increasing by 0.01% to 0.64% and the 10-year increasing by 0.07% to 12.89%.

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

The biggest improvements for firms on the Kamakura Troubled Company Index were driven by improved quarterly earnings, resulting in improved performance of the Net Income to Market Value of Assets variable over the past month. On the other end of the spectrum, the majority of the defaults occurred in the UK. During the month, I had the opportunity to hear Sarah Hewin of Standard Chartered Global Research present an economic report entitled “Uncomfortably Optimistic” at the IACPM European conference in Amsterdam. I was surprised at the time to see that year-over-year GDP growth in the UK trailed that of all the other European countries. For that reason, our UK results were not a shock when they came out.

From a macroeconomic perspective, the United States is in its 106th month of recovery. Economic recovery cycles last an average of just 59 months, based on data since 1945. That raises an important question: where do we stand in the credit cycle?

The Expected Cumulative Default Curve is a good starting point for analysis. This predictor of expected future defaults continued to steepen over the month, which certainly invites further exploration. Focusing on the 10-year expected cumulative default rate, we find that the telecommunications sector is the riskiest, while healthcare is the safest. Analyzing the data in more detail leads us to the conclusion that the retail and telecommunications sectors are in a downturn. Energy is in a repair phase of the credit cycle, while healthcare and utilities continue to be in an expansionary phase.

Country-specific analysis yields equally interesting results. Leverage is high and increasing in some countries while remaining low and stable in others. Economic headwinds include central bank and Chinese deleveraging and trade protectionism. Adding to the instability are Brexit and a new anti-EU government in Italy, as well as the on-again, off-again planned talks on the Korean peninsula.

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 14.47%. 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:

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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.

For more information, please contact:
Kamakura Corporation
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Telephone: 1-808-791-9888
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