Kamakura Troubled Company Index Hits Record Levels For 'Best Credit Conditions' In May

by: Donald van Deventer


The Kamakura troubled company index measures the percent of 34,000 public firms with 1 month default probabilities over 1.00%.

The index set an all-time low of 4.06% on May 19 and closed the month at 4.32%.

At the same time, 18% of the high yield index member firms had 5 year default probabilities above the same 1.00% threshold level.

Kamakura Corporation reported Monday that the Kamakura troubled company index ended the month of April at 4.32%, a one month decrease of 0.32%, after setting all all-time record for "best conditions" of 4.06% on May 19. That is the lowest percentage of troubled firms since index calculations began in January 1990. 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 May, the percentage of the global corporate universe with default probabilities between 1% and 5% was 3.58%, a decrease of 0.21%; the percentage of the universe with default probabilities between 5% and 10% was 0.49%, a decrease of 0.07%; the percentage between 10% and 20% was 0.20%, a decrease of 0.01%; while the percentage of companies with default probabilities over 20% was 0.05%, a decrease of 0.02%. The index hit an intra-month high of 4.55% on May 6th, while the intra-month low was the May 19th record, 4.06%.

At 4.32%, the troubled company index is at the 100th 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 May, four were from the United States, two each from Russia and Brazil and one each from Italy and 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 once again was the firm with the highest one-year default rating at 38.22%. NII Holdings (NASDAQ:NIHD), which has had the highest one-year default rating for the past several months, was the second riskiest on the list with a default probability of 36.57%. While NII is traded on the US stock exchange, it primarily provides mobile communications services in five Latin American countries. RadioShack (NYSE:RSH), American Apparel (APP), and Central European Media (NASDAQ:CETV) were the other American firms on the "top 10" list.

Martin Zorn, President and Chief Operating Officer for Kamakura Corporation, said Monday:

"The Troubled Company Index is priced for perfection but is far from perfect. The search for yield combined with very low levels of default has resulted in buyers continuing to chase yield while believing that bonds are overpriced. This is especially true in the high yield segment. Junk-bond funds have seen net inflows in 12 of the past 15 weeks, according to Lipper. When we look at the troubled company index we see that 4.32% of the universe has a one-month default probability over 1%. By comparison 18% of the High Yield index has a 5-year default probability over 1%. The ten riskiest names in this group are listed below. As I have commented in the past the term structure of default is never more important than when the short-term default risk looks non-existent."

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 11.76%. 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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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