Kamakura Corporation reported that the Kamakura index of troubled public companies showed considerable improvement in October, dropping 247 basis points to 7.26% after deteriorating in the five previous months. The index reached an intra-month low of 6.68%. At the 7.26% level, corporate credit quality is at the 75th percentile (with 100 being best all time credit quality) over the period from 1990 to the present. In December, 2010, by contrast, the index was at the 99th percentile of credit quality. Tokyo Electric Power Company continues to be the firm with the worldâs highest one-month default risk among rated companies, with a default probability of 52.88%.
In October, the percentage of the global corporate universe with default probabilities between 1% and 5% was 5.81%, a decrease of 172 basis points. The percentage of companies with default probabilities between 5% and 10% was 0.94%, a decline of 45 basis points. The percentage of the universe with default probabilities between 10% and 20% was 0.39% of the universe, a decrease of 18 basis points, while the percentage of companies with default probabilities over 20% was 0.11% of the total universe in October, a decrease of 13 basis points.
Martin Zorn, Chief Administrative Officer for Kamakura Corporation, said Friday, âThe improvement in the Kamakura troubled company index was driven both by surging stock prices and the fact that the calendar fourth quarter experiences fewer corporate defaults than other periods of the year. Of the riskiest 14 firms with legacy credit ratings, ranked by one month default risk, six firms have legacy ratings of A or higher. All of these six firms were non-U.S. financial institutions, raising some doubt about the timeliness of ratings in the overseas branches of legacy rating agencies. Six of the 14 firms are European banks potentially affected by the European sovereign debt crisis. Only 3 U.S. firms were included in the 14 riskiest firms with legacy ratings: General Maritime, Trailer Bridge, and Eastman Kodak.â
The Kamakura troubled company index measures the percentage of more than 30,000 public firms in 37 countries that have annualized 1 month default risk over one percent. Kamakuraâs index had reached a recent peak of 25.57% in November 2008. The average index value since January 1990 is 12.37%. 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, so it includes the insights of the worst part of the recent credit crisis. The countries currently covered by the index include Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Greece, Hong Kong, India, Indonesia, Ireland, Israel, Italy, Japan, Luxemburg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Poland, Russia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, United Kingdom, and the United States.