Press Release

Kamakura: Risks Rise For Bond Holders and Commercial Lenders
Kamakura Troubled Company Index Jumps to Highest Level Since February

NEW YORK, November 1, 2018: The Kamakura Troubled Company Index ® ended October at 12.69%, an increase of 3.38% over September. The index reflects the percentage of 39,000 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 10.25%—an increase of 2.60% over the previous month. The percentage with a default probability between 5% and 10% was 1.50%, an increase of 0.35%. Those with a default probability between 10% and 20% amounted to 0.75% of the total, up 0.34%, and those with a default probability of over 20% amounted to 0.19%, up 0.09% from a month earlier.

Volatility increased significantly, with the index ranging from 9.04% on October 3 to 14.30% on October 29. For the year, the index has ranged from 7.00% on January 15 to 15.19% on February 8.



At 12.69%, the troubled company index now sits at the 43rd percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in October five are in the United States, two in Great Britain with one each in Australia, Hong Kong, and the Netherlands. Iconix Brand Group, Inc. (ICON: NASDAQ) remained the riskiest global company, with a one-year Kamakura Default Probability (KDP) of 43.51%. The firm posting the largest one-month increase in the one-year KDP was Debenhams PLC (DEB: UK), up 23.90 basis points. The firm reported plans to close 50 of its underperforming stores and is entering the Christmas season with increased uncertainty.

Also, in October, five companies in Kamakura’s coverage universe defaulted. Four were from the United States and one from Italy. The largest was Sears Holdings, an American department store icon for 125 years.



The Kamakura expected cumulative default curve for all rated companies worldwide moved up, with the one-year default probability increasing by 0.31% to 1.17% and the 10-year probability increasing by 0.32% to 12.97%.

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

October saw a significant increase in default probabilities and volatility, with the Kamakura Troubled Company Index closing at the riskiest levels since February. Market factors contributed to the increase. Specific company financial results cushioned the risks in some cases and accelerated them in others. Anxiety about a slowing global economy, the upcoming U.S. midterm elections, and the uncertain results of trade talks between the U.S and China were major contributors to market uncertainty. Foreign exchange and commodity prices also impacted the markets.

Understanding movements in the term structure of default probabilities is critical late in a credit cycle. This is the point where companies take on too much leverage as they stretch for earnings, and investors take on too much risk as they chase after yield. A case in point is the decision by New York Community Bank (NYSE:NYCB) to buy back up to $300 million of shares funded by subordinated debt. The default probability for the firm has been rising and was higher than the industry median even before this action. Now its one-year default probability has spiked higher than its five-year default probability--another sign of potential distress portfolio managers should note.



Time will tell if the spike in the Troubled Company Index is an early warning sign for the turn in the credit cycle or simply a reflection of market anxiety. In any case, money managers ignore such moves at their peril.

About the Troubled Company Index
The Kamakura troubled company index (Reg. U.S. Pat) 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 14.41%. 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 69 countries currently covered by the index are: Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, 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 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 (www.twitter.com/dvandeventer)
Kamakura President Martin Zorn (www.twitter.com/riskmgrhi) and
Kamakura’s official twitter account (www.twitter.com/KamakuraCo).

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
Information: info@kamakuraco.com
Web site: www.kamakuraco.com