Kamakura Corporation reported Monday that the Kamakura troubled company index ended the month of February at 4.96%, a decrease of 0.59% from the prior month. This leaves the index at the 99th percentile (with 100 indicating "best") of credit conditions from January 1990 to the present. The index reflects the percentage of the Kamakura 35,000 public firm universe that has an annualized one-month 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 February, the percentage of the global corporate universe with one-month default probabilities between 1% and 5% was 4.14%, the percentage of the universe with default probabilities between 5% and 10% was 0.53%, while the percentage between 10% and 20% was 0.20%. The percentage of companies with default probabilities over 20% was 0.09%, the same as last month. The index hit an intra-month high of 5.93% on February 3rd, while the intra-month low of 4.96% was on February 28th. The magnitude of change in the index during the month was 97 basis points compared to 63 basis points last month.
At 4.96%, 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 February, three were from the United States; two were from Brazil, and one each from China, Greece, Ireland, Italy and Russia. NII Holdings (NASDAQ:NIHD) had the highest default probability among rated companies at 30.87%. While NII is traded on the US stock exchange, it primarily provides mobile communications services in five Latin American countries. Irish Life & Permanent, James River Coal (JRCC), PDG Realty S.A. (OTC:PDGRF)(OTCPK:PDGRY), and Eurobank Ergasias (OTCPK:EGFEY)(OTC:EGFEF) filled out the list of the top 5 firms.
Martin Zorn, President and COO for Kamakura Corporation, said Monday:
"Overall credit conditions are excellent as indicated by the troubled company index being at the 99th percentile. However, it is critical to remember that default probabilities rise and fall with the business cycle making it critical to understand the term structure of default probabilities. Equally important, short-term default probabilities rise and fall more dramatically than long-term default probabilities. In this environment it is critical to focus on the relative default probability, that is, which companies have the highest probability for default and which companies have the greatest relative movements in their default probabilities. Moreover this is the time to focus on understanding the full default probability term structure to gain insight into the how company financial performance, macro factors and market conditions drive credit risk. For example, 43% of world-wide public firms have annualized 10 year default probabilities of more than 1.00%."
The Kamakura troubled company index measures the percentage of more than 35,000 public firms in 56 countries that have annualized one-month default risk over one percent. The average index value since January, 1990 is 11.84%. 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 are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Canada, Chile, China, Colombia, Cyprus, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kuwait, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, the United States, and Vietnam.
Additional disclosure: Kamakura Corporation has business relationships with a number of the organizations mentioned in the article.