Kamakura Reports Decline in Corporate Credit Quality in May

New York - 2 June 2010

Kamakura Troubled Company Index Jumps 0.84% to 10.30%

Kamakura Corporation announced Wednesday that the Kamakura index of troubled public companies deteriorated significantly in May after improving for 12 of the previous 13 months. The index jumped from 9.46%% in April to 10.30% in May. Kamakura’s index had reached a recent peak of 24.3% in March, 2009. The intra-month index value had gotten as low as 9.09% after that. Kamakura defines a troubled company as a company whose short term default probability is in excess of 1%. Credit conditions in May were better than credit conditions in 67 percent of the months since the index’s initiation in January 1990, and the index is still 3.36 percentage points better than the index’s historical average of 13.66%. The all-time low in the index was 5.40%, recorded on May 11, 2006, while the all-time high in the index was 28.0%, recorded on September 28, 2001. The index is based on default probabilities for more than 29,200 companies in 33 countries.

In May, the percentage of the global corporate universe with default probabilities between 1% and 5% was 6.98%, an increase of 48 basis points. The percentage of companies with default probabilities between 5% and 10% was 1.62%, an increase of 20 basis points. The percentage of the universe with default probabilities between 10 and 20% was 1.01% of the universe, up 15 basis points, while the percentage of companies with default probabilities over 20% was 0.69% of the total universe in May.

Kamakura’s President Warren A. Sherman said Wednesday, “Over the weekend the New York Times posed the question ‘Can someone please explain to me why anyone believes in ratings?’

The importance of that question is borne out by the chart below which shows the highest 5 year cumulative default probabilities for firms with ratings in the markets that were open on Monday. Seven of the 12 firms have investment grade ratings in spite of cumulative default probabilities that are over 15% for all 12 firms.”

The Kamakura index uses the annualized one month default probability produced by the best performing credit model of the Kamakura Risk Information Services default and correlation service. The model used is the fourth generation Jarrow-Chava reduced form default probability, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors. The countries currently covered by the index include Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Indonesia, Ireland, Israel, Italy, Japan, Luxemburg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, United Kingdom, and the United States.

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