Kamakura Corporation reported Monday that the Kamakura troubled company index ended December at 11.02%, an increase of 0.51% from the prior month. 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 December, the percentage of the global corporate universe with default probabilities between 1% and 5% was 8.77%, up 0.37% from November; the percentage of the universe with default probabilities between 5% and 10% was 1.48%, up 0.04%; the percentage between 10% and 20% was 0.60%, up 0.08%; while the percentage of companies with default probabilities over 20% was 0.17%, up 0.02% from the previous month. The index is up 3.75% over the past year.
At 11.02%, the troubled company index rose to the 55th 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 December, nine were from the United States and one was from Brazil. The riskiest company on the current list continued to be Cumulus Media (NASDAQ:CMLS).
Martin Zorn, President and COO for Kamakura Corporation, said Monday:
"The troubled company index has been steadily increasing since hitting an intra-year low in April reflecting increasing default risk throughout the year. We enter 2016 with significant credit headwinds. Critical factors include divergent central bank strategies, continued pressure on currencies, the aftermath of the brutal downturn in oil prices with no sign of recovery for natural resources; political risk that continues to increase across the Middle East and Europe and disappointing manufacturing data from China. As we begin earnings reports in the US, data from FactSet indicate that the earnings among the S&P 500 is expected to decline 4.7% from last year with the index weighed down by energy and materials. Business spending in the US contracted over the last part of the year as a result of the strong dollar, weak overseas demand, sizable inventory levels and rising labor and health costs. The short term risks continue to be concentrated in the resource sector however when we use KRIS to analyze longer term default risks and expand the universe to non-rated firms we find broader risks on a geographic, industry and company basis. "
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 1-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 macroeconomic 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 Vietnam.
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