Kamakura Reports Slight Decline In Corporate Credit Quality In June

Includes: END, NIHD, RSH
by: Donald van Deventer


The percentage of worldwide public firms with 1 month default probabilities over 1% increased 0.13% in June to 4.45%.

At a 1-year horizon, 7.68% of the universe has default probabilities over 1%.

At a 5-year horizon, 26.02% of the universe has default probabilities over 1%. Be ready.

Kamakura Corporation reported Tuesday that the Kamakura troubled company index ended the month of June at 4.45%, a one-month increase of 0.13%. 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.

At the end of June, the percentage of the global corporate universe with default probabilities between 1% and 5% was 3.61%, an increase of 0.03%; the percentage of the universe with default probabilities between 5% and 10% was 0.56%, an increase of 0.07%; the percentage between 10% and 20% was 0.20%, unchanged from the prior month; while the percentage of companies with default probabilities over 20% was 0.08%, an increase of 0.03%. The index hit an intra-month high of 4.45% on June 25th, while the intra-month low of 4.17% was on June 19th.

At 4.45%, the troubled company index is at the 99.66th 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 June, three were from the United States, two from Russia and one each from Brazil, India, Italy, Greece and the UAE. The U.S. firms included NII Holdings (NASDAQ:NIHD), RadioShack (NYSE:RSH), and Endeavour International (NYSE:END). Nine of the companies on this list have seen increases in their default probabilities over the past three months. Eurobank Ergasias S.A. became the rated company with the highest one-year default probability of 26.24%. Among unrated companies, Corinthian Colleges Inc. had the highest one-year default probability at 59.78%.

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

"The Troubled Company Index has been soaring at heights that have been unseen over the history of the index. When we look at the troubled company index, we see that 4.45% of the universe has a one-month default probability over 1%. By comparison 7.68% of the universe has a one-year default probability over 1% and this jumps to 26.02% for the five-year default probability. Since the beginning of the year the average number of companies with their five-year default probability over 1% is 30.41%. Back in early 2006 I was told by one of my colleagues that the difference between us was that I worried about "theoretical risk" while he worried about 'real' risk. I think he was focused on the 30-day default probability instead of the drivers of the five-year default probability."

The Kamakura troubled company index measures the percentage of more than 34,000 public firms in 62 countries that have annualized 1-month default risk over one percent. The average index value since January 1990 is 11.74%. 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 62 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 Vietnam.

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