Kamakura Corporation reported Friday that the Kamakura troubled company index ended the month of April at 6.40%, a decrease of 0.65% over the past 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 April, the percentage of the global corporate universe with default probabilities between 1% and 5% was 4.56%, down 0.47% from the end of March; the percentage of the universe with default probabilities between 5% and 10% was 0.80%, down 0.12%; the percentage between 10% and 20% was 0.27%, down 0.06%; while the percentage of companies with default probabilities over 20% was 0.09%, down 0.09% from the previous month.
At 5.72%, the troubled company index rose to the 91st 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 April, four were from the Greece, two from the United States and one each from Brazil, Canada, Great Britain and United Arab Emirates. The riskiest company on the list was Piraeus Bank SA (TPEIR0) while Molycorp Inc (MCP) was the riskiest US Company on the list. All four of the Greek companies on the list were banks, representing the concentration of risk in the event of a sovereign default.
Martin Zorn, President and COO for Kamakura Corporation, said Friday "We witnessed a strong reduction in default risk as measured by the troubled company index over the past month. Markets and macro factor movements were fairly benign as earnings reports resulted in stronger balance sheets for many in the index. The last week of April saw some strong market gains for previously out of favor sectors. Volatility remained low and there was a reversal in the strength of the dollar and upward movement in key rates. However, I cannot help wonder if this is the calm before the storm. Three factors that worry me over the near-term are: the long term effect of negative interest rates, the trend in leverage finance to utilize the proceeds for acquisitions and the $1 trillion of maturing commercial real estate debt over the next three years. We are also seeing the effect of low oil prices result in a spike in bankruptcies. I would be running default simulations on these factors as well as paying attention to the tail risk in my portfolio. "
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 11.54%. 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.