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Kathren Bade
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Kamakura Reports Improved Corporate Credit Quality in March

Kamakura Troubled Company Index Decreases 0.16% to 4.80% 

Kamakura Corporation reported Tuesday that the Kamakura troubled company index ended the month of March at 4.80%, a decrease of 0.16% from the prior month.  The index reflects the percentage of the Kamakura 34,000 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 March, the percentage of the global corporate universe with default probabilities between 1% and 5% was 3.93%, a decrease of 0.21%; the percentage of the universe with default probabilities between 5% and 10% was 0.62%, an increase of 0.09%; the percentage between 10% and 20% was 0.18%, a decrease of 0.02%; while the percentage of companies with default probabilities over 20% was 0.07%, a decrease of 0.02%. The index hit an intra-month high of 5.33% on March 14th, while the intra-month low of 4.75% was on March 25th.

At 4.80%, the troubled company index is at the 99th percentile of historical credit quality (with 100 being best all time) over the period from January 1990 to the present.  Among the ten riskiest firms in March, five were from the United States; two were from Brazil, and one each from Greece, Ireland, and Russia. NII Holdings remained the firm with the highest one-year default probability among rated companies at 30.87%. While NII is traded on the US stock exchange it primarily provides mobile communications services in five Latin American countries.

Martin Zorn, President and COO for Kamakura Corporation, said Tuesday, “Overall credit conditions are excellent as indicated by the troubled company index being at the 99th percentile.  Given the current environment it is important to understand the term structure for default risk.  The troubled company index measures the universe of issuers that have a one-month default probability over 1%.  If one were to only use this index then focusing on the ordinal ranking within the universe would be a key indicator of relative risk.  However, it is more useful to focus on the full term structure for risk much in the same way that one uses a term structure for interest rates.  This paints a very different and insightful picture for the analyst.  If we were to focus on the 99th percentile we would see the cutoff for inclusion for the one month default probability is 2.32% which quickly rises to 6.04% for the six-month default probability, 7.17% for the 1 year, then falls to 5.35% for the 2-year but rises again to 11.47% for the five-year default probability.  It is critical to understand the drivers of risk even in an environment that looks benign in the short run since this is the point that investors and lenders tend to become overly complacent.

The Kamakura troubled company index measures the percentage of more than 34,000 public firms in 61 countries that have annualized 1 month default risk over one percent. The average index value since January, 1990 is 11.81%. Since November, 2010, the Kamakura index has used the annualized one month default probability produced by the KRIS version 5.0 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 version 5.0 model was estimated over the period from 1990 to 2008, and includes the insights of the worst part of the recent credit crisis. The  61 countries currently covered by the index are  Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Canada, Chile, China, Colombia, Cyprus, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kuwait, Luxembourg, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Russia, Saudi Arabia, 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 Vietnam.