Press Release

Kamakura Reports a Decline in Corporate Credit Quality in June
Kamakura Troubled Company Index Increases 0.60% to 8.30%

NEW YORK, July 5, 2017: Kamakura Corporation reported Wednesday that the Kamakura troubled company index ended June at 8.30%, an increase of 0.60% from the prior month. The index reflects the percentage of the Kamakura 39,000 public firm universe that has a default probability over 1.00%. An increase in the index reflects declining credit quality while a decrease reflects improving credit quality.

As of the end of June, the percentage of the global corporate universe with default probabilities between 1% and 5% was 6.76% an increase of 0.41% from the prior month; the percentage of the universe with default probabilities between 5% and 10% was 1.08%, an increase of 0.10% from the prior month; the percentage between 10% and 20% was 0.37%, up 0.09%; while the percentage of companies with default probabilities over 20% was 0.09%, unchanged from the previous month. The index ranged from 7.59% on June 8 to 8.6% on June 27. Volatility increased from the prior month.


At 8.30%, the troubled company index declined to the 79th percentile of historical credit quality (with 100 being best all time) over the period from January 1990 to the present. Among the ten riskiest rated firms in June six were from the United States, two from Great Britain and one each from Australia and Singapore. During the month, there were 4 defaults in the coverage universe. Ascena Retail Group, Inc. (NASDAQ: ASNA) became the riskiest rated firm with a one-year KDP of 27.59%, up 11.51% in the past month. Ascena is a national retailer offering apparel and accessories for women notably under the Ann Taylor brand. It has 4800 stores in the US, Canada and Puerto Rico. On June 13 they announced that they will be closing up to 667 stores.


 

Martin Zorn, President and Chief Operating Officer for Kamakura Corporation, said Wednesday, “For some time we have been pointing out that long-term default risk has been rising even as the short-term credit risk has remained low. There are many reasons for this including historically low rates combined with low spreads masking the impact of increasing leverage. Leverage was the one of the leading causes of default in the last cycle and these risks become more evident in the term structure of default. In addition to the Expected Cumulative Default chart I have included a chart of the ten-year Kamakura Default Probability (KDP) of five of the highest rated US issuers – AAPL, GOOGL, JNJ, MSFT and XOM. As you can see the term default probabilities of these highly rated firms have been increasing over the past five years. Last month we talked about ‘Death by Amazon” and given that the riskiest firm in our universe is Ascena Retail Group a related question is what real estate developers or REITS will be effected. This is an example of why correlated risk is so critical to understand. Our founder and CEO, Dr. van Deventer described the current environment very well in a talk last month to National Association of Credit Manager’s 121st Credit Congress and Expo, ‘Be careful and Move Fast”. Being nimble and incorporating best practices in portfolio management are always important but are essential in today’s environment.”





The Kamakura troubled company index measures the percentage of 38,000 public firms in 68 countries that have annualized 1 month default risk over one percent. The average index value since January, 1990 is 14.71%. Beginning in 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 is provided to subscribers which includes full model test results and parameters. 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 Kamakura Risk Manager. Models available 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 United States market. Macro factor parameter subscriptions include Heath, Jarrow and Morton term structure models for government securities in the United States, Germany, the United Kingdom, Canada, Spain, Sweden, Australia, Japan, Thailand and Singapore. All parameters are derived in a no arbitrage manner consistent with the seminal papers by Heath, Jarrow and Morton and 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, which 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 United Kingdom, the United States, and Viet Nam.

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 2 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 with 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 ranging in size from $1.5 billion to $1.6 trillion in assets. Kamakura’s risk management products are currently used in 43 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, the Ukraine, Eastern Europe, the Middle East, Africa, South America, Australia, Japan, China, Korea, India and many other countries in Asia.

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 contact
Kamakura Corporation
2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815
Telephone: 1-808-791-9888
Information: info@kamakuraco.com
Twiter: @Kamakuraco
Web site: www.kamakuraco.com