Kamakura Corporation reported Monday that the Kamakura troubled company index ended the month of July at 6.99%, an increase of 0.48% 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 July, the percentage of the global corporate universe with default probabilities between 1% and 5% was 5.57%, up 0.41% from the end of June; the percentage of the universe with default probabilities between 5% and 10% was 0.97%, up 0.02%; the percentage between 10% and 20% was 0.34%, up 0.07%; while the percentage of companies with default probabilities over 20% was 0.11%, down 0.02% from the previous month. The index is up 2.41% over the past year and was last in this range six months ago.
At 6.99%, the troubled company index fell to the 74th 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 July, seven were from the United States, two from Greece and one from Japan. The riskiest company on the list was Resolute Energy Corporation (NYSE:REN). The firm reported receiving a delisting notice from the NYSE in late July. As can be seen below, the KDP (Kamakura Default Probability) for the firm has been rising since October, 2014 ahead of the S&P downgrade last year.
Martin Zorn, President and COO for Kamakura Corporation, said Monday "Last month we began by discussing the headline risk of Greece and Puerto Rico. One month later we continue to focus on both of these as one appears to have a bailout and the other is entering a workout phase. Commodities began a fresh round of weakening in June that shows no sign of abating. This can clearly be seen in the jump in KDPs among natural resource companies. China's July manufacturing PMI fell to 47.8, its lowest since July 2013. Forecasts from auto manufacturers indicate that car sales in China could fall for the first time ever this year. A few trillion in margin debt and a weak Chinese stock market can have an impact. In addition to industry and sector pressure there continues to be company-specific risk across portfolios."
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 11.50%. 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: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.