Through A Glass Darkly

06/01/2020 09:58 AM

Through A Glass Darkly

Kamakura Troubled Company Index Increases by 0.41% to 31.71%
Credit Quality Remains at the 4th Percentile

NEW YORK, June 1, 2020: What do J.C. Penney, Neiman-Marcus, J. Crew, Hertz, Avianca, Virgin Australia, and Latam Airlines Group have in common?

If you said they are all in the retail or travel business, you would be correct. If you said they all defaulted in the past month you would also be correct. Finally, if you said they were all troubled companies prior to the onset of the COVID-19 pandemic, you would be correct. The early financial casualties were firms already in a precarious position prior to the economic shocks of government mandated shutdowns. The question now is, what are the risks as we slowly reopen economies, the fiscal stimulus money is spent, and monetary policy continues to move in uncharted territory?

“Threat of negative rates hangs over the US money fund industry,” read the Financial Times headline on May 30. The prior day, money funds had announced they were waiving fees so they would not go negative. What will be the magnitude and repercussions of the outflows if they do go negative? A possible clue: on September 16, 2008 the Primary Reserve Fund “broke the buck,” causing a money market run. Will history repeat when the first fund goes negative this time?

The effect of negative rates has been shown to be toxic and has not solved problems in Japan or Europe. We should not expect the outcome to be any different in the United States. This is an area where Kamakura has produced significant research and has given many presentations. It is just one dimension of risk that can be compared to fanning the flames with gasoline, as we already see weak companies succumbing to default and expect the pace to accelerate in the months ahead.

The Kamakura Troubled Company Index® remained relatively stable, with a small increase of 0.41% to 31.71% compared to April 30, and it remained at the 4th percentile. The index continued to be highly volatile, ranging during the month from 25.69% to 32.4%. 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 May, the percentage of companies with a default probability between 1% and 5% was 22.43%, an increase of 0.05% over the month. The percentage with a default probability between 5% and 10% was 4.97%, an increase of 0.16%. Those with a default probability between 10% and 20% amounted to 2.73% of the total, an increase of 0.03%; and those with a default probability of over 20% amounted to 1.58%, an increase of 0.17%.

Troubled Company Index – May 29, 2020

At 31.71%, the Troubled Company Index remained at the 4th percentile of historical credit quality as measured since 1990.

Among the 10 riskiest-rated firms listed in May, eight were in the U.S, and one each in Australia and Great Britain. The riskiest firm was Noble Corporation PLC, with a one-month KDP of 85.04%, up 30.19% over the past month. We had 13 defaults in our coverage universe during May and 32 over the past two months. Seven were in the U.S. and one each in Australia, Chile, Columbia, Japan, Luxembourg, and the UK. The defaults were concentrated in energy, retail, and travel.

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 increasing by 0.29% to 3.76%, while the 10-year rate increased by 2.69% to 24.15%, exceeding the level established during the peak of the credit crisis. This is the third consecutive month that the expected 10-year cumulative default rate has been higher than the prior peak during the credit crisis.

Expected Cumulative Default Rate


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

The fact that the cumulative expected default rate exceeded the level set during the Great Recession caught my attention, primarily because it poses such a contrast to the Standard & Poor’s Index, which closed the week above 3,000. The possibility that money funds could turn negative poses risks of mass withdrawals. When I visited the Charles Schwab research website, I saw two different warnings about negative rates on their fixed income search screens.

The U. S. Federal Reserve has established numerous new lending facilities to supply the world with dollar liquidity. In the process, the Fed’s the balance sheet has grown from $4.1 trillion in February to over $7.1 trillion at the end of May. There is no free lunch, and there will surely be negative unintended consequences. As we speculate about those consequences, the picture becomes even more uncertain than if we simply consider the expected default rate.

It is specifically because we are sailing in uncharted waters that we need simulation models to test what the outcomes could be. Too many times we hear otherwise competent professionals dismiss model results as being “non-intuitive.” But as our Director on Research, Professor Robert Jarrow, has said many times,” history is just one scenario from a Monte-Carlo simulation”. Now is the time to run these simulations.

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 14.50%. 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 riskneutral 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 nonpublic 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. Current clients have a combined “total assets” or “assets under management” in excess of $26 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
Facsimile: 1-808-791-9898
Web site: