Kamakura Reports Slight Decline In Corporate Credit Quality In July

by: Donald van Deventer


The Kamakura troubled company index rose 0.13% to 4.58% in July. The index measures the percent of public firms with 1 month default probabilities over 1.00%.

Banco Espirito Santo S.A. was the riskiest public firm in the world among the universe of firms with legacy credit ratings.

NII Holdings, RadioShack, and Endeavour International were the 3 riskiest U.S. firms.

Kamakura Corporation reported Friday that the Kamakura troubled company index ended the month of July at 4.58%, a one month increase of 0.13%. Although slight, this is the first back to back monthly increase in the index this year. The index reflects the percentage of the Kamakura 35,000 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 July, the percentage of the global corporate universe with default probabilities between 1% and 5% was 3.68%, an increase of 0.07%; the percentage of the universe with default probabilities between 5% and 10% was 0.58%, an increase of 0.02%; the percentage between 10% and 20% was 0.24%, an increase of 0.04%; while the percentage of companies with default probabilities over 20% was 0.08%, unchanged from the prior month. The index hit an intra-month high of 4.58% on July 31st, while the intra-month low of 4.13% was on July 18th. We also saw an increase in the volatility of index over the period.

At 4.58%, the troubled company index is at the 98.98th 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 July, three were from the United States, including NII Holdings (NASDAQ:NIHD), RadioShack (NYSE:RSH) and Endeavour International (NYSE:END). Two firms were from Russia and one each were from Brazil, India, Greece, Portugal and the UAE. All of the companies on this list have seen increases in their default probabilities over the past six months. Banco Espirito Santo S.A. (OTCPK:BKESF) (OTCPK:BKESY) became the rated company with the highest one-year default probability, 34.99%. Last month's riskiest company, Eurobank Ergasias S.A. (OTCPK:EGFEY) (OTC:EGFEF), was fifth on the list. Two Russian electric distribution companies were also on the list.

Martin Zorn, President and COO for Kamakura Corporation, said Friday, "Although we have seen slight declines in credit quality as measured by the Troubled Company Index over the past two months, I believe we will see a more bearish pattern developing over the near-term. The longer term default probabilities have been signaling problems in credit-land for a while. What we do not know is whether the broader recognition of the risks will be transmitted as a result of one of the many geo-political flash points that have been simmering around the globe, disinflation pressure in the Euro-zone, pressure on the Federal Reserve to raise rates or the break in record inflows into high yield names. One can see warnings building in the default probabilities for the rated names in the high yield index. The 95th percentile of the high yield index has a one-year default probability of 0.91%, just under the cutoff point for the Troubled Company Index. By comparison the 95th percentile for the rated universe at large has a one-year default probability that is 27% lower. If I were a betting man I would wager that the credit perfection bubble is about to burst."

The Kamakura troubled company index measures the percentage of more than 35,000 public firms in 61 countries that have annualized 1 month default risk over one percent. The average index value since January, 1990 is 11.71%. 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.

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