$600 A Day for A Car Rental?
Kamakura Troubled Company Index Decreases by 3.57% to 14.07%
Credit Quality At the 39th Percentile
NEW YORK, April 5, 2021: “Car Rentals $600 a Day,” the Honolulu news headline blared.
Surely, that’s a mistake.
Nope. Turns out rates are even higher on Maui. Prefer a convertible? That’ll run you $1,000. One agency said that for every car it rented, 50 to 60 would-be customers were turned away.
What’s going on here? Is this gross disruption in the supply chain unique to the Hawaiian Islands, or to the tourism industry? Don’t count on it. Global fiscal stimulus, amplified by government cries of “Go big!” could soon bring similar problems to your own doorstep.
The Kamakura Troubled Company Index® indicated that credit quality improved in March with a decline in default probabilities of 3.57% to 14.07%. Volatility continued to moderate, with default probabilities ranging from 14.07% on March 31 to 17.78% on March 4 and ending the month at the 39th percentile. 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 March, the percentage of companies with a default probability between 1% and 5% was 11.78%, a decrease of 2.76% over the previous month. The percentage with a default probability between 5% and 10% was 1.51%, a decrease of 0.50%. Those with a default probability between 10% and 20% amounted to 0.60% of the total, a decrease of 0.21%; and those with a default probability of over 20% amounted to 0.18%, a decrease of 0.10%.
Troubled Company Index – March 31, 2021
Among the 10 riskiest-rated firms listed in March, six were in the U.S., with one each in Australia, China, Mexico, and Switzerland. The riskiest-rated firm remained GTT Communications Inc. (NYSE:GTT), a U.S. telecommunications firm whose one- month KDP was 32.74%. The second riskiest-rated firm last month was the Washington Prime Group Inc. (NYSE:WPG), which defaulted on March 17 after skipping an interest payment and entering into talks to restructure its debt.
Riskiest Rated Companies based on 1-month KDP
The Kamakura expected cumulative default curve for all rated companies worldwide widened, with the one-year expected default rate decreasing by 0.31% to 0.64%, while the 10-year rate increased by 1.13% to 14.79%. The implied forward rate increased slightly, as the expected default rate in 2022 will increase from 0.64% in 2021 to 1.16%. That makes intuitive sense when you consider the current climate of low interest rates and aggressive fiscal policies.
Expected Cumulative Default Rate – March 31, 2021
By Martin Zorn, President and Chief Operating Officer, Kamakura Corporation
The first quarter of 2021 markets were marked by fiscal stimulus and vaccine rollouts that have exceeded expectations. This resulted in positive equity results in most markets. While there were periods of volatility the equity markets moved to new highs. We did see a market rotation as value stocks outperformed growth while commodities were mostly lower.
Central banks remained accommodative, with low rates and readily available capital. When combined with aggressive fiscal stimulus, the expectation for defaults and bankruptcies remains low – as can be seen by the improving credit metrics in the Troubled Company index. The longer term is much more uncertain, as the Expected Cumulative Default index shows in the five-to-10-year segment.
We weren’t kidding about the price of rental cars in Hawaii. But the situation also serves as a metaphor for disrupted supply chains and uncertain outcomes everywhere as economies rebound from the 2020 pandemic. When governments “print money” and “go big,” with progressives calling for them to “go bigger,” we would do well to remember that there is no free lunch. The risks of inflation, higher taxes and bursting bubbles are all real threats to equity markets, debt markets, and the economy as a whole. As a result, we expect to see an increase in volatility as bond and equity markets vacillate between expectations of economic strength and worries about the very real dangers of fiscal activism. This is an environment that calls for best practice stress testing of your portfolio and exposures.
About the Troubled Company Index
The Kamakura Troubled Company Index® measures the percentage of 40,500 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 14.57%. 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 CorporationFounded 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 10.0.5, 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 $7.0 trillion. Current clients have a combined “total assets” or “assets under management” in excess of $28 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)
Kamakura’s official twitter account (www.twitter.com/KamakuraCo).
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