Kamakura Troubled Company Index Shows Slight Decline in Credit Quality in February

Kamakura Corporation reported Wednesday that the Kamakura index of troubled public companies rose slightly in February just six weeks after setting an all time low of 4.36% on December 17. The index jumped 0.07% to reach 6.01% in February. The Kamakura troubled company index measures the percentage of 29,400 public firms in 37 countries that have annualized 1 month default risk over one percent. Beginning with the November 2010 index value, the Kamakura troubled company index is now based on the version 5.0 default models from Kamakura Risk Information Services. Previously, the index was reported using the KRIS version 4.1 models. The version 5 models were estimated over the period from January 1990 to December 2008 and therefore capture the key events of the credit crisis in the fall of 2008.

Kamakura’s index had reached a recent peak of 22.25% in January, 2009. Credit conditions at the end of February were better than credit conditions in 93.08% of the months since the index’s initiation in January 1990. This result, surprising to many, reflects the fact that companies in the “troubled category” are almost exclusively financial institutions or housing related firms, rather than a broad cross section of the economy. The average index value since January 1990 is 12.59%.
The all-time high in the index was 27.41%, recorded on October 31, 2001.

In February, the percentage of the global corporate universe with default probabilities between 1% and 5% was 4.84%, an increase of 7 basis points. The percentage of companies with default probabilities between 5% and 10% was 0.81%, a decrease of 2 basis points. The percentage of the universe with default probabilities between 10 and 20% was 0.28% of the universe, up 1 basis point, while the percentage of companies with default probabilities over 20% was 0.08% of the total universe in February, an increase of 1 basis point.

Martin Zorn, Chief Administrative Officer for Kamakura Corporation, said Wednesday, “Among the 2,110 firms in the KRIS corporate universe with legacy ratings, only 5 firms showed increases in 1 month annualized default risk of more than 60 basis points. Only one of these firms was headquartered in the United States. These results continue to reflect that fact that the balance sheets of most corporations outside of the construction and finance related industries remain strong.”

Beginning in November, 2010, the Kamakura index uses 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 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.

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