Corporate Default Risk Moderates

10/02/2019 01:51 PM

Corporate Default Risk Moderates

Kamakura Troubled Company Index Declines by 1.37% to 13.30%

NEW YORK, October 2, 2019: The Kamakura Troubled Company Index® ended September at 13.30%, a decrease of 1.37% from the prior month. 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 September, the percentage of companies with a default probability between 1% and 5% was 10.59%, a decrease of 1.05% from the prior month. The percentage with a default probability between 5% and 10% was 1.74%, a decrease of 0.13%. Those with a default probability between 10% and 20% amounted to 0.75% of the total, a decrease of 0.11%; and those with a default probability of over 20% amounted to 0.22%, a decrease of 0.08% over the prior month.

The index ranged from 15.07% on September 3 to 12.06% on September 13. Volatility remained high.

At 13.30%, the Troubled Company Index now sits at the 40th percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in September, nine are in the U.S., with one in Switzerland. Ascena Retail Group Inc. (NASDAQ:ASNA) became the riskiest rated firm, with a one-year KDP of 50.16% up 5.24% over the previous month. During the month there were five defaults, with four in the U.S. and one in the UK. The UK default, as many of you may have seen in news headlines, was Thomas Cook Group, which was the second- riskiest rated company in our universe last month.

Another headline grabber, though not in our coverage universe, was retailer Forever 21, which filed for bankruptcy protection on September 30. It is worth noting that three of the ten riskiest firms in the Troubled Company Index are in the retail sector.

The Kamakura expected cumulative default curve for all rated companies worldwide narrowed as the one-year expected default rate decreased by 0.17% to 1.31% and the 10-year rate decreased by 0.07% to 14.86%.


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

The failure and liquidation of Thomas Cook Group reminded me of a quote from the CEO of a large Canadian pension fund who said, “I certainly don’t ever want to be on your riskiest company list”. The reduced form modeling of default probabilities continues to demonstrate remarkable advanced warning and predictive power.

One of the firms on the riskiest- rated company list is Noble Corporation PLC (NYSE: NE), which announced the departure of its chief financial officer earlier in the month. The firm was recently downgraded, but as you can see, the Kamakura Default Probability reflected the increased risk ahead of the downgrade, while the Merton structural model did not.

Given the risk of the retail sector, I thought it would be interesting to examine the REIT sector for correlated risk. While CBL & Associates is the riskiest REIT and invests in shopping centers, primarily is the Southeastern and Midwestern U.S., the other REITs in the composite index are holding up well.

While the Troubled Company Index improved, ending the month at the 40th percentile, it is still considerably below its average since 2000. In addition, the forward one-year expected default rate increased from 1.86% last month to 1.88%. Both of these indicators should be cautionary flags for portfolio and risk managers.

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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