Global Uncertainty Rises

03/01/2022 10:13 PM

Global Uncertainty Rises
Kamakura Troubled Company Increases by 0.60% to 6.99%
Credit Quality Weakens to the 88th Percentile

NEW YORK, March 2, 2022: The year started with an increase in global uncertainty, which has now accelerated as geopolitical tensions have exploded into war.  Unprecedented financial sanctions against Russia continue to disrupt financial markets and created risks not foreseen even a month ago.

The Kamakura Troubled Company Index® indicates that credit quality—at the 88th percentile—remains very good by historical measures but default risk has been slowly rising. The Index closed February at 6.99%, compared to 6.39% the month before. Volatility moderated, with default probabilities ranging from 4.28% on February 9 to 7.23% on February 24. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the close of February, the percentage of companies with a default probability between 1% and 5% was 5.91%, an increase of 0.39% from the previous month. The percentage with a default probability between 5% and 10% was 0.78%, an increase of 0.13%. Those with a default probability between 10% and 20% amounted to 0.24% of the total, representing an increase of 0.07%; and those with a default probability of over 20% amounted to 0.06%, an increase of 0.01% over the prior month. This level shows that worldwide corporate credit quality is at the 88th percentile for the period of 1990 to 2021, with 100 indicating “best conditions.”

Figure 1: Troubled Company Index — February 28, 2022

Among the 20 riskiest-rated firms listed in February, six each were in China and the U.S., with two in Mexico, and one each in Great Britain, Netherlands, Norway, Russia, Sweden and Switzerland. The riskiest-rated firm was Lannett Company, Inc. (NYSE:LCI) with a one-month KDP of 25.13%, up 13.40% from the previous month.  There were three defaults in the Kamakura coverage universe, with one each in Canada, China and the United States.

Table 1: Riskiest-Rated Companies Based on 1-Month KDP – February 28, 2022

 

The Kamakura Expected Cumulative Default Rate, the only daily index of credit quality for rated firms worldwide, shows the one-year rate up 0.38% at 1.94%, and the 10-year rate down 0.74% to 18.43%.

Figure 2: Expected Cumulative Default Rate — February 28, 2022

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

The biggest risks markets now face, not surprisingly, are related to the consequences of the Russian invasion of Ukraine. These include shifts in the geopolitical environment, as well as global economic and financial fallout. How will the unfolding events impact inflation, interest rates, energy prices, and foreign exchange, to name just a few considerations? The markets were expecting aggressive Increases in interest rates, but in addition to the policy change, there are now many unknown factors to consider.

Given the rapidly evolving environment, stochastic simulations—including analytical testing for tail risk, as well as reverse stress testing—are now the most appropriate tools for a portfolio manager to use, since the results can allow them to react quickly and appropriately to market changes.

One immediate question based on events of the past days is how the sanctions have impacted publicly-rated Russian firms and Russian banks. The tables below show significant increases in default probabilities over the past month. Because the Russian stock market remains closed, the market factor inputs have not been factored into these default probabilities. We will continue to provide updates in our blogs.

Table 3: 1-Year KDP Rated Russian Companies – February 28, 2022
 

Table 4: 1-Year KDP Russian Banks

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 14.28%.  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 10.1, 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 $38 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).

For more information, please contact:
Kamakura Corporation
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