Cassandra vs. Goldilocks

10/03/2021 07:53 PM

Cassandra vs. Goldilocks
Kamakura Troubled Company Index Increases by 0.95% to 3.56%
Credit Quality Remains Strong at the 99th Percentile

 NEW YORK, October 4, 2021: Though short-term default risk remains very low, the number of risks – some old and some new – keep increasing.  Can the markets and central banks navigate these rougher seas, or is this the time for market participants to hedge their risks?

The Kamakura Troubled Company Index® indicates that credit quality remained benign in September, with the index at 3.56%, compared to 2.61% last month. Volatility was also low, with default probabilities ranging from 2.54% on September 6 to 4.01% on September 20.  The low for the index was set on August 12, at 2.06%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the close of September, the percentage of companies with a default probability between 1% and 5% was 3.24%, an increase of 0.81% from the previous month. The percentage with a default probability between 5% and 10% was 0.26%, an increase of 0.26%. Those with a default probability between 10% and 20% amounted to 0.05% of the total, representing an increase of 0.05%; and those with a default probability of over 20% amounted to 0.01%, an increase of 0.01% prior month. This level shows that worldwide corporate credit quality is at the 99th percentile for the period of 1990 to 2021, with 100 indicating “best conditions.”

Troubled Company Index — September 30, 2021


Among the 20 riskiest-rated firms listed in September there were nine in China, seven in the U.S. and one each in Brazil, India, Ireland and Spain. This is the first time that the country with highest number of riskiest-rated firms was China.  The riskiest-rated firm was once again GTT Communications, Inc. (OTCMKTS:GTTN), a U.S multinational telecommunications and internet service provider.  The firm had a one-month KDP of 14.19%, up 1.69% from the previous month. There were three global defaults in the Kamakura coverage universe, two of which occurred in China and the other in the Philippines.

Riskiest-Rated Companies Based on 1-Month KDP – September 30, 2021

The Kamakura Expected Cumulative Default Rate, the only daily index of credit quality of rated-firms worldwide, shows the one-year rate up 0.18% at 0.75%, and the 10-year rate down 1.69% at 19.61%. The expected cumulative default rate for 10 years exceeds the 10-year rate in September, 2008 (the month that Lehman, AIG, FNMA, FHLMC and Washington Mutual failed).

Expected Cumulative Default Rate — September 30, 2021

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

September ended with an increase in cross-currents for portfolio managers to digest.  The S&P500 had its worst monthly performance since March, 2020.  China is facing a power crisis, and Evergrande dominated headlines everywhere. Global energy markets were roiled by commodity shortages.  As of the end of the month, there were an estimated 500,000 containers sitting on cargo ships off the Southern California coast, providing a daily reminder of the continuing challenges plaguing the supply chain.

At the same time, global M&A activity continued at record levels. No new Covid variants were announced, and the Delta surge has begun to abate. Inflation continued to accelerate and incomes edged up, albeit at a slower pace. Washington narrowly avoided the shutdown of the U.S.  government — at least for now — but continued to exhibit dysfunction at all levels.

Recent commentary by Nouriel Roubini (“Goldilocks Is Dying”) and Mohamed El-Erian (“Taming the Stagflationary Winds”) examines the current macroeconomic cross-currents and describes four potential scenarios that could result.   In the “Goldilocks” outcome, supply chain bottlenecks will disappear and no new Covid variants will emerge.  On the opposite end of the spectrum, pressures on the demand side will lead to a global slowdown. In an in-between scenario, we could see growth accelerating as bottlenecks clear, with inflationary pressure continuing to build and central banks scrambling to catch up. Another possibility is stagflation, forcing central banks to walk a tightrope as they try to normalize rates without triggering a crisis amid high public and private debt ratios.

In sum, looming ahead, there is one possible good outcome and three possible bad ones.  The Kamakura Expected Cumulative Default Rate continues to show very low short-term default risk and very high long-term risk.  We need to heed these warnings. even if we think the risks can be managed.

Of course, international political risks can’t be easily managed – which brings me back to China.  I do not think that the Evergrande collapse is going to be a “Lehman moment.”  But I do believe this is the beginning of the end of China’s “build, build, build” strategy.  There is enough empty apartment space in the country to house the entire population of five of the G7 nations.  Commercial real estate is estimated to represent as much as 29% of China’s GDP.  Changing demographics and increasing government control over businesses lead us to expect slowing growth in this sector – and likely, in general.

Despite near-zero default rates, with global uncertainties mounting and economic indicators moving at cross-purposes, this is a good time to hedge risks.  If you’re wondering whether de-risking would be a better strategy, I suggest focusing more closely on the bond market than the equity or bank loan markets for insights.

Kamakura CEO Dr. Donald van Deventer addresses the current situation in his daily blog, Corporate Bond Investor, which examines attribution of risks as they relate to changes in bond prices. The table below shows the one-month attribution as of September 30, 2021.


Bond Performance Attribution – September 30, 2021


Dr. van Deventer’s analysis provides insights into whether systemic risk (as measured by Treasury-related changes) or company-specific risks (as measured by credit related changes) are driving the price changes.  The bond market has a strong track record for providing insight about future economic growth.

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 14.43%.  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 $34 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 (
Kamakura President, Martin Zorn (
Kamakura’s official twitter account (

For more information, please contact:
Kamakura Corporation
2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815
Telephone: 1-808-791-9888
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