Kamakura Corporation reported Wednesday that the Kamakura troubled company index ended January at 8.42%, a decrease of 1.23% 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%. On a year over year basis the index declined 5.29% reflecting an overall improvement in credit quality. 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 6.88%, a decrease of 0.85% from the prior month; the percentage of the universe with default probabilities between 5% and 10% was 1.09%, a decrease of 0.28% from the prior month; the percentage between 10% and 20% was 0.36%, down 0.07%; while the percentage of companies with default probabilities over 20% was 0.09%, a decrease of 0.03% from the previous month. The index ranged from 8.39% on January 30 to 9.65% on January 2. Volatility has been muted over the past several months.
At 8.42%, the troubled company index was at the 79 th 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, six were from the United States, three from Canada and one from Great Britain. During the month, there were three defaults in the coverage universe. Vanguard Natural Resources (NYSE:VNR) remained the riskiest firm with a 1-year Kamakura Default Probability ("KDP") of 31.95%.
Martin Zorn, President and Chief Operating Officer for Kamakura Corporation, said Wednesday, "Earlier this month I was at lunch with a preeminent credit practitioner who asked me whether I was surprised by the credit markets in 2016. I responded that I had not expected to see the improvement in our troubled company index. Similarly, I did not expect the further improvement that occurred in January. However, the numbers tell a different story when you begin to analyze the longer term default probabilities where the riskiest companies show significant increases in risk year over year. I suspect that the equity market performance and central bank actions are influencing shorter term risk measures while fundamentals continue to influence the longer-term risk measures. The VIX index hit its lowest levels since 2007 while at the same time the US Economic Policy Uncertainty Index hit a 3-year high at the end of January. European credit spreads continued to decline because of equity market performance and actions by the ECB. Two thirds of all European high yield bonds now trade under 3%. We have also seen a surge in global high yield issuance. Time will tell if this is the calm before the storm but the contrary movement of our longer term default probabilities compared to the short end of the Kamakura Default Probability term structure is enough to give pause and require analysis and diligence."
The Kamakura troubled company index measures the percentage of 38,000 public firms in 68 countries that have annualized 1 month default risk over one percent. The average index value since January, 1990 is 14.77%. 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, Thailand 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 68 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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