Corporate credit quality dropped from the 63rd percentile at the end of May to the 57th percentile at the end of June according to a new report from Kamakura Corporation. Kamakura reported today that the Kamakura troubled company index ended the month of June at 8.51%, an increase of 0.63% since the end of May. The index reflects the percentage of the Kamakura 32,000 public firm universe that has a default probability over 1.00%. An increase in the index reflects deteriorating credit quality. As of June 30, the percentage of the global corporate universe with default probabilities between 1% and 5% was 6.81%, up 0.50% from last month. The percentage of the universe with default probabilities between 5% and 10% was 1.10%, while the percentage between 10% and 20% was 0.41%. The percentage of companies with default probabilities over 20% was 0.19%, up 0.02% from last month.
At 8.51%, the troubled company index is at the 57th percentile of historical credit quality (with 100 being best all time) over the period from January 1990 to the present. That is a drop of 6 percentage points from last month. Telecom Italia (TI) had the world's highest one-month default risk among rated companies, at 13.38%. Among the ten riskiest firms in June, six were European firms; two were from South America and one each from China and Canada. Connacher Oil & Gas (OTCPK:CLLZF) had the highest one-month default probability of any rated firm in North America at the end of June.
Europe continued to be the primary area of credit worries again in June, with on-going problems in the banking and telecommunications sectors. Rising interest rates in the United States are having a broad impact on the U.S. financial sector and we expect that trend to continue.
The Kamakura troubled company index measures the percentage of more than 32,000 public firms in 37 countries that have annualized 1 month default risk over one percent. The average index value since January 1990 is 12.00%. 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 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.