Have the Debt Markets Reached a Tipping Point?

11/04/2019 01:41 PM

Have the Debt Markets Reached a Tipping Point?

Kamakura Troubled Company Index Declines by 0.29% to 13.01%

NEW YORK, November 4, 2019: With trillions of dollars of global debt due to mature in the next five years, investors should begin preparing for a large wave of defaults, financial research suggests. For the moment, however, the Kamakura Troubled Company Index® remains relatively stable. It ended October at 13.01% a decrease of 0.29% 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 October, the percentage of companies with a default probability between 1% and 5% was 10.27%, a decrease of 0.32% from the prior month. The percentage with a default probability between 5% and 10% was 1.81%, an increase of 0.07%. Those with a default probability between 10% and 20% amounted to 0.71% of the total, a decrease of 0.04%; and those with a default probability of over 20% amounted to 0.22%, the same as the prior month.

The index ranged from 14.93% on October 2 to 12.45% on October 30. Volatility moderated to 2.48%. For the year to date, the index has ranged from 10.11% on April 22 to 16.72% on August 5.

At 13.01%, the Troubled Company Index now sits at the 42nd percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in October, seven are in the U.S., with one each in Spain, Switzerland, and the UK. Ascena Retail Group Inc. (NASDAQ:ASNA) remained the riskiest rated firm, with a one-year KDP of 54.62%, up 4.46% over the previous month. During the month there were three defaults, with two in the U.S. and one in Thailand.

The Kamakura expected cumulative default curve for all rated companies worldwide widened as the one-year expected default rate decreased by 0.12% to 1.19% and the 10-year rate increased by 0.76% to 15.62%.


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

The Federal Reserve cut its benchmark interest rate on Wednesday, but Jerome Powell made it clear that only a “material reassessment” of the economic outlook would cause the Fed to consider further cuts. Though the corporate default rate remains benign, real risks are on the horizon.

Analysis by Oxford Economics shows that $4 trillion of debt will be maturing over the next five years. The chart below shows the breakdown between investment grade and speculative debt in that mix.


With this much debt requiring refinancing, it is not a surprise that the Kamakura expected cumulative default curve displays a bulge in expected defaults over the next five years. Economic slowing, especially if it’s combined with a slide in investor confidence, could very quickly produce a jump in defaults. Energy, retail, and telecommunications remain the riskiest sectors.

Analysis of unrated global issues, however, reveals a spectrum of broader risk. While 70% of the riskiest rated firms are American issuers, we can see below that when unrated firms are included, 60% of the riskiest firms are international and 20% are from Hong Kong, demonstrating broader risk for the global markets. Rollover risk should be one of the primary concerns among debt buyers and lenders over the next several years.

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.

To follow risk commentary by Kamakura on a daily basis, please follow:
Kamakura CEO Dr. Donald van Deventer (
Kamakura President Martin Zorn ( and
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
Facsimile: 1-808-791-9898
Web site: