Kamakura Reports Decline in
Corporate Credit Quality in November
Kamakura Troubled Company Index Increases 0.45% to 7.61%
NEW YORK, December 4, 2017: The Kamakura “troubled company” index ended November at 7.61%, an increase of 0.45% from October 31. The index reflects the percentage of 39,000 public firms with a default probability of over 1.00%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.
As of the end of November, the percentage of the global corporate universe with default probabilities between 1% and 5% was 6.36%—an increase of 0.34% over last month. The percentage with default probabilities between 5% and 10% was 0.94%, an increase of 0.08%. Those with a default percentage between 10% and 20% amounted to 0.26% of the total, up 0.03%, and those with default probabilities over 20% remained at 0.05%, the same as last month. Volatility remained low during the month, with the index ranging from 6.87% on November 9 to 7.70% on November 29.
At 7.61%, the troubled company index declined to the 85th percentile of historical credit quality (with 100 being the best all time) over the period from January 1990 to the present. Among the ten riskiest rated firms in November, eight are in the United States, one is in Australia, and one is in the UK. EV Energy Partners, L.P. (NASDAQ:EVEP) became the riskiest rated global company of all. During the month of November there were six defaults in the Kamakura coverage universe.
“Though Kamakura’s troubled company index indicates that corporate credit quality has declined somewhat, positive economic growth continued across regions throughout 2017,” said Martin Zorn, President and Chief Operating Officer for Kamakura Corporation. “Eurozone performance has been stronger than expected and emerging markets have also seen strong growth throughout the year. Economic problems and defaults have been company- or country-specific. In Asia, increases in China’s government bond yields continued in November. These factors have contributed to benign credit conditions, reflected in our overall troubled company index. The strength of the global economy and low interest rates will likely continue to drive a low level of defaults in the short term. The risks seem to be focused around geopolitical worries in the short run. In the longer term, we continue to be concerned about the level of the 10-year cumulative default curve.”
The Kamakura expected 10-year cumulative default rate for all rated companies world-wide improved by 0.31% to 13.93% at the end of the month, up from 14.24% on October 31, 2017. That’s still above the 13.33% experienced in September 2008:
The Kamakura troubled company index measures the percentage of 39,000 public firms in 68 countries that have an annualized one- month default risk of over one percent. The average index value since January, 1990 is 14.56%. 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 68 countries currently covered by the index are: Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kuwait, Luxembourg, Malaysia, Malta, 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, Taiwan, Thailand, Turkey, the United Arab Emirates, the UK, the U.S., and Vietnam.
To follow the troubled company index and other 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) and
Kamakura’s official twitter account (www.twitter.com/KamakuraCo).
About Kamakura Corporation
Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing, and software. Kamakura was named to the World Finance 100 by the editor and readers of World Finance magazine in 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 8.1, 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. 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 $1.6 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, many other countries in Asia, Europe and the Middle East.
Kamakura has world-wide alliances with Fiserv (www.fiserv.com) and SCSK Corporation (http://www.scsk.jp/index_en.html) making Kamakura products available in almost every major city around the globe.
For more information, please contact:
2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815
Web site: www.kamakuraco.com