Kamakura Corporation reported Monday that the Kamakura troubled company index ended July at 9.86%, a decrease of 1.10% from the prior month. The index reflects the percentage of the Kamakura 38,000 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 8.03%, a decrease of 0.87% from the prior month. The percentage of the universe with default probabilities between 5% and 10% was 1.25%, down 0.15%; the percentage between 10% and 20% was 0.44%, down 0.06%. The percentage of companies with default probabilities over 20% was 0.14%, down 0.02% from the previous month. The index ranged from 9.79% to 10.66% during the month reflecting a sharp decline in volatility.
At 9.86%, the troubled company index was at the 65th 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 July, seven were from the United States and one each was from Brazil, Great Britain and Japan. During the month there were seventeen defaults in our coverage universe with four from Germany, two each from Australia, China and the US and one each from Canada, Cyprus, Great Britain, Greenland, Japan, Korea and Singapore. PDG Realty SA Empreendimentos (PDGR3.SA) remained the riskiest rated company with a KDP of 32.08%.
Our focus on bond prices this month is once again on Navios Maritime Holdings (NYSE:NM) the sixth riskiest rated company at the end of July. Last month's review was focused on the 8.125% bonds due 2019. The bond continued to have active trading activity over the month and saw an increase in price that corresponded with a reduction in the Kamakura 1-year default probability. Today's chart shows the corresponding price movement compared to the movement in the firm's 1-year KDP.
Martin Zorn, President and Chief Operating Officer for Kamakura Corporation, said Monday "The markets refocused on fundamentals rather than on the headlines. This resulted in an overall improvement in the Troubled Company Index but select increases for the riskiest names within the index. This is appropriate as this was third consecutive month that we saw increases in the number and geographic breadth of actual defaults. We saw Germany test the limit of negative rates on original issues and a shortage of eligible bonds for purchase by central banks continuing to pursue non-conventional policies. We continue to worry that the unwinding of the extraordinary actions by the central banks will end badly from a credit perspective. Central banks are not able to stimulate global economic growth with monetary policy alone which makes the political will and sentiment with respect to fiscal policy an increasingly important component of the future direction of economic growth and corresponding default risk."
The Kamakura troubled company index measures the percentage of 38,000 public firms in 67 countries that have annualized 1-month default risk over one percent. The average index value since January 1990, is 14.87%. 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 67 countries currently covered by the index are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kuwait, Luxembourg, Malaysia, Malta, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, 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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