Kamakura Corporation reported Monday that the Kamakura Troubled Company Index ended January at 13.71%, an increase of 3.23% from December. The index hit an intra-month high of 16.83 on January 20th, indicating the highest level of risk in five years. The index reflects the percentage of the Kamakura 36,000 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 January, the percentage of the global corporate universe with default probabilities between 1% and 5% was 10.61%, up 1.84% from the prior month; the percentage of the universe with default probabilities between 5% and 10% was 2.02%, up 0.54%; the percentage between 10% and 20% was 0.77%, up 0.17%; while the percentage of companies with default probabilities over 20% was 0.31%, up 0.14% from the previous month. The index is up 5.44% over the past year.
At 13.71%, the Troubled Company Index dropped to the 44th percentile of historical credit quality (with 100 being best all time) over the period from January 1990 to the present. Among the ten riskiest rated firms in January, all ten were from the United States and nine were from the natural resource sector. The riskiest company on the current list continued to be Cumulus Media (NASDAQ:CMLS). The second riskiest company from last month's list, SFX Entertainment (NASDAQ:SFXE), declared bankruptcy this morning.
Martin Zorn, President and Chief Operating Officer for Kamakura Corporation, said Monday:
"The troubled company index has been steadily signaling increased risk since hitting an intra-year low last April and on January 20 reflected the highest level of risk in five years. One month into the New Year we see continued weakening of global economic conditions, 21% of global GDP is covered by a Central Bank with negative rates and the short end of the yield curve has plummeted; in fact the US 2-year Treasury was below where it was prior to the Federal Reserve rate increase. In the current environment risk managers must use multi factor models with robust stress analytics. Single factor or even three-factor models will fail analysts in the current environment. The current volatility and uncertainty represent the conditions in which the best portfolio managers using the most modern analytical tools are able to demonstrate the return on investment of quantitative risk tools."
The Kamakura Troubled Company Index measures the percentage of more than 36,000 public firms in 61 countries that have annualized 1-month default risk over one percent. The average index value since January, 1990 is 14.95%. Beginning in November 2015, the Kamakura index has used the annualized one month default probability produced by the KRIS version 6.0 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 KRIS version 6.0 models were developed using a data base of more than 2.2 million observations and more than 2,600 corporate failures. A complete technical guide is provided to subscribers which includes full model test results and parameters. The KRIS service also includes a wide array of other default probability models that can be seamlessly loaded into Kamakura's state of the art enterprise risk management software engine Kamakura Risk Manager. Models available include the non-public firm default model, the commercial real estate model, the U.S. bank model, and the sovereign model. Related data includes credit default swap trading volume by reference name, market implied credit spreads, and prices on all traded corporate bonds traded in the United States market. Macro factor parameter subscriptions include Heath, Jarrow and Morton term structure models for government securities in the United States, Germany, the United Kingdom, Canada, Spain, Sweden, Australia, Japan and Singapore. All parameters are derived in a no arbitrage manner consistent with the seminal papers by Heath, Jarrow and Morton and Amin and Jarrow. A KRIS Macro Factor Scenario Service subscription includes both risk neutral and "real world" empirical scenarios for interest rates and macro factors.
The version 6.0 model was estimated over the period from 1990 to May, 2014, which includes the insights of the entirety 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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