Kamakura Corporation reported Thursday that the Kamakura troubled company index ended the month of April at 4.63%, a one month decrease of 0.21%. 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 April, the percentage of the global corporate universe with default probabilities between 1% and 5% was 3.79%, a decrease of 0.14%; the percentage of the universe with default probabilities between 5% and 10% was 0.56%, a decrease of 0.06%; the percentage between 10% and 20% was 0.21%, an increase of 0.03%; while the percentage of companies with default probabilities over 20% was 0.07%, which was unchanged. The index hit an intra-month high of 5.06% on April 11th, while the intra-month low of 4.63% was on April 30th.
At 4.63%, 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 April, four were from the United States; three were from Russia, two were from Brazil, and one from Greece. All of the companies on this list have seen increases in their default probabilities over the past three months. The Federal Grid Company of Russia became the firm with the highest one-year default rating at 38.26%. NII Holdings, which had the highest one-year default rating for the past several months, was the second riskiest on the list with a default probability of 36.46%. 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 Thursday, “We continue to see short term credit conditions that are excellent as indicated by the troubled company index being at the 99th percentile. Market pricing, banks easing their lending policies for commercial & industrial loans as reported in the Federal Reserve’s Senior Loan Officer Opinion Survey and tightening spreads mirror this view. As indicated before it is important to understand the term structure for default risk in this environment.
The troubled company index measures the universe of issuers that have a one-month default probability over 1%. When using this list one should focus on the ordinal ranking within the universe as well as the relative changes in default probability as key indicators of risk. Using the term structure for default will provide additional insight. For example only 4% of the 2,500 rated companies in our universe have a 1-year default probability over 1%. This percentage moves to 5% when one looks at the 3-year default probability and jumps to 15% for the 5-year default probability.
More interesting may be to look at the term risk for leveraged companies. In the table below we focus on the companies with the highest 3-year default probability among in the High Yield Index. Very quickly you can identify industry concentrations that should be examined more deeply. We are in the period of the credit cycle when tomorrow’s bad loans are being underwritten and originated. This is the point when chief credit officers differentiate themselves by taking advantage of the quantitative tools available and making tough but courageous decisions that will benefit their institutions through the next cycle.”
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 11.79%. 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 Viet Nam.