Kamakura Corporation announced Tuesday that the Kamakura index of troubled public companies deteriorated for the third consecutive month in October, rising a very significant 1.17% to 11.10%. Kamakuraâs index had reached a recent peak of 24.3% in March, 2009 and a post crisis low of 9.09% in April 2010. Kamakura defines a troubled company as a company whose short term annualized default probability is in excess of 1%. Credit conditions in October were better than credit conditions in 60.1 percent of the months since the indexâs initiation in January 1990. The index is now only 2.48 percentage points better than the indexâs historical average of 13.58%. 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 29,400 companies in 33 countries.
In October, the percentage of the global corporate universe with default probabilities between 1% and 5% was 7.27%, an increase of 56 basis points. The percentage of companies with default probabilities between 5% and 10% was 1.85%, an increase of 37 basis points. The percentage of the universe with default probabilities between 10 and 20% was 1.06% of the universe, up 5 basis points, while the percentage of companies with default probabilities over 20% was 0.92% of the total universe in October, an increase of 19 basis points.
David Boldon, Washington DC representative for Kamakura Corporation, said Tuesday, âThe very substantial decrease in credit quality is coming from a wide array of smaller firms who do not have legacy agency ratings. No rated firm showed an increase in one month default probabilities of more than 33 basis points this month. Over the course of October, the day by day deterioration in public firm credit quality has been steady and of great concern.â
The Kamakura index uses the annualized one month default probability produced by the KRIS fourth generation 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 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.