Vigilance is Key in Debt Markets
Kamakura Troubled Company Index Decreases by 0.15% to 12.86%
NEW YORK, December 3, 2019: With the holidays upon us many are focused on the outlook for retail sales. But we should also be concerned about defaults of Chinese bonds (especially for offshore issues), which many analysts expect to increase over the next 12 months.
The Kamakura Troubled Company Index® remains relatively stable. It ended November at 12.86%, a decrease of 0.15% from the end of October. The index reflects the percentage of 40,500 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 November, the percentage of companies with a default probability between 1% and 5% was 10.18%, a decrease of 0.09% from the prior month. The percentage with a default probability between 5% and 10% was 1.71%, a decrease of 0.10%. Those with a default probability between 10% and 20% amounted to 0.77% of the total, an increase of 0.06%; and those with a default probability of over 20% amounted to 0.20%, a decrease of 0.02% from prior month.
The index ranged from 12.5% on November 8 to 13.3% on November 20. Volatility moderated to 0.80%, one of the lowest monthly levels this year.
At 12.86%, the Troubled Company Index remains at the 42nd percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in October, eight are in the U.S., with one each in Spain and the U.K.
Ascena Retail Group Inc. (NASDAQ:ASNA) remained the riskiest rated firm, with a one-year KDP of 54.56%, up 2.10% over the previous month. During the month there were three defaults, all in the U.S. One of these was Dean Foods, which filed for Chapter 11 bankruptcy protection on November 11 and has been on the top10 riskiest list for some time.
The Kamakura expected cumulative default curve for all rated companies worldwide narrowed as the one-year expected default rate increased by 0.03% to 1.22% and the 10-year rate decreased by 0.84% to 14.78%.
By Martin Zorn, President and Chief Operating Officer, Kamakura Corporation
With the US-China trade war dragging on for a second year, its effects continue to broaden. Exports in general are slowing. This can be seen most clearly in Europe, where new trade data released by the OECD showed that global exports declined by 0.7% in the third quarter, while they fell by 1.8% in the EU. The German economy is not likely to grow at all this year. Foreign trade amounts to 83% of the EU’s gross domestic product (GDP), according to World Bank 2018 figures, while it represents only 38% of GDP in China and 27% in the U.S.
These numbers paint a cautionary tale for central banks’ efforts to stimulate domestic economies with rate cuts, especially for the European Central Bank (ECB), which is doubling down on quantitative easing and further lowering its negative key interest rate. According to many analysts, the trade numbers limit fiscal policies’ ability to fight global problems by stimulating domestic demand.
During the year we have seen an uptick in Chinese defaults and have seen the KDPs for the riskiest Chinese firms rise sharply.
I do not expect a lot of surprises through the end of the year. Rather, it is a good time to evaluate portfolios and shed risk as we prepare for 2020.
About the Troubled Company Index
The Kamakura Troubled Company Index® measures the percentage of 40,575 public firms in 76 countries that have an annualized one- month default risk of over one percent. The average index value since January 1990 is 14.35%. 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 76 countries currently covered by the index are: Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, 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, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.
About Kamakura Corporation
Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing, and software. Kamakura was recognized as a category leader in the Chartis Report,Technology Solutions for Credit Risk 2.0 2018. 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.
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