Kamakura Corporation reported Monday that the Kamakura troubled company index ended the month of December at 6.42%, an increase of 1.31% from the end of November. The index reflects the percentage of the Kamakura 34,000 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 5.03%, up 0.92% from November; the percentage of the universe with default probabilities between 5% and 10% was 0.95%, up 0.27%; the percentage between 10% and 20% was 0.31%, up 0.6%; while the percentage of companies with default probabilities over 20% was 0.13%, up 0.06% from the previous month.
At 6.42%, the troubled company index tumbled to the 82.6th 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 December, three were from the United States, two from Russia, and one each from Brazil, Canada, Greece, Mongolia and United Arab Emirates. The riskiest company on the list this month is RadioShack (NYSE:RSH), followed by BPZ Resources Inc. (NYSE:BPZ). Every firm on the list saw an increase in its default probability over the month and half of the firms were in the natural resource and extraction industries.
Martin Zorn, President and Chief Operating Officer for Kamakura Corporation, said Monday "In 2014 we saw markets and central banks begin moving in different directions. The Federal Reserve has been preparing the market for rate increases while the European Central Bank is moving towards further easing. Japan took dramatic steps to weaken the yen while oil prices and the ruble tumbled. It does not seem that long ago that that the investment assumption was that America was slowing and emerging markets were the future. We have been warning about credit risks signs embedded in our term default probabilities while this month we saw the signals emerge in the movement of the troubled company index. We believe 2015 could be a very dangerous year. The theme is be very careful and understand how a changing environment can help or hurt you. It's no time to go double or nothing."
The Kamakura troubled company index measures the percentage of more than 34,000 public firms in 61 countries that have annualized 1 month default risk over one percent. The average index value since January, 1990 is 11.60%. 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.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.