Corporate Default Risk Increases Sharply

Sep. 03, 2019 1:18 PM ETBATL
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Bonds, Portfolio Strategy, Banks, risk management

Contributor Since 2009

Donald R. van Deventer founded the Kamakura Corporation in April, 1990 and is currently Chairman and Chief Executive Officer. Dr. van Deventer's emphasis at Kamakura Corporation is enterprise wide risk management and modern credit risk technology. The third edition of his book, Advanced Financial Risk Management (with Kenji Imai and Mark Mesler) is forthcoming in 2022.  Dr. van Deventer was senior vice president in the investment banking department of Lehman Brothers (then Shearson Lehman Hutton) from 1987 to 1990. During that time, he was responsible for 27 major client relationships including Sony, Canon, Fujitsu, NTT, Tokyo Electric Power Co., and most of Japan's leading banks. From 1982 to 1987, Dr. van Deventer was the treasurer for First Interstate Bancorp in Los Angeles. In this capacity he was responsible for all bond financing requirements, the company’s commercial paper program, and a multi-billion dollar derivatives hedging program for the company. Dr. van Deventer was a Vice President in the risk management department of Security Pacific National Bank from 1977 to 1982. Dr. van Deventer holds a Ph.D. in Business Economics, a joint degree of the Harvard University Department of Economics and the Harvard Graduate School of Business Administration. He was appointed to the Harvard University Graduate School Alumni Association Council in 1999 and served through 2021. Dr. van Deventer was Chairman of the Council for four years from 2012 to 2016. From 2005 through 2009, he served as one of two appointed directors of the Harvard Alumni Association representing the Graduate School of Arts and Sciences. Dr. van Deventer also holds a degree in mathematics and economics from Occidental College, where he graduated second in his class, summa cum laude, and Phi Beta Kappa. Dr. van Deventer speaks Japanese and English.


  • The Kamakura Troubled Company Index increased by 2.49% to 14.67% in August.
  • The index measures the percentage of public firms in Kamakura's coverage universe that are "troubled," defined as having a 1 month default probability over 1%.
  • Last month's riskiest rated firm, Halcon Resources, filed a reorganization plan in August.

NEW YORK, September 3, 2019:  The Kamakura Troubled Company Index ®   ended August at 14.67%, an increase of 2.49% from the prior month.  The index reflects the percentage of 40,575 public firms that have a default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the close of August, the percentage of companies with a default probability between 1% and 5% was 11.64%, an increase of 1.80% from the prior month.  The percentage with a default probability between 5% and 10% was 1.87%, an increase of 0.34%. Those with a default probability between 10% and 20% amounted to 0.86% of the total, an increase of 0.26%; and those with a default probability of over 20% amounted to 0.30%, an increase of 0.09% over the prior month.

The index ranged from 13.55% on August 21 to 16.72% on August 5.  Volatility increased from last month.

At 14.67%, the troubled company index now sits at the 35th percentile of historical credit quality as measured since 1990. Among the 10 riskiest-rated firms listed in August, eight are in the U.S., with one each in Great Britain and Spain.  Frontier Communications (FTR) was the riskiest-rated firm, with a one-year of KDP of 48.81%, up 25.02%  from the prior month.  Last month’s riskiest firm, Halcon Resources, filed for court approval of a reorganization plan on August 7.  In addition to Halcon, two other U.S. firms and one Mexican firm in our coverage universe defaulted.

The Kamakura expected cumulative default curve for all rated companies worldwide widened as the one-year expected default rate increased by 0.17% to 1.48% and the 10-year rate increased by 0.76% to 14.93%.


By Martin Zorn, President and Chief Operating Officer, Kamakura Corporation

The Expected Cumulative Default Rate continues to point towards an increase in defaults in 2020. The expected one-year default rate for next year jumped to 58 basis points.  This indication of economic weakening is consistent with the Federal Reserve’s cut in interest rates at the end of July and many current economic forecasts.  Using the Expected Cumulative Curve, we can extract these one-year-forward expected defaults and see their evolution of over the past months.  They have consistently pointed to an economic weakening, with an increase in the default rate followed by a recovery in 2021.

Forward One-Year Cumulative Default Rate  

May 2019


June 2019


July 2019


August 2019


May 2020


June 2020


July 2020


August 2020


May 2021


June 2021


July 2021


August 2021


Using another view, we can disaggregate the one-year expected cumulative default rate by sector.  Energy, telecommunications, and consumer discretionary goods remain the sectors most at risk.  On Friday, August 20, the Wall Street Journal published an article entitled “Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale,”  which described rising bankruptcies in the U.S. oil industry and noted that energy companies with junk-rated bonds had been defaulting at the highest level since 2017.  Followers of Kamakura’s Expected Cumulative Default Rate would have seen this risk building over the past 18 months.

Equally interesting is the country view, which has been showing increased risk in Spain, Italy, Japan, China, and most recently, Canada.

1-Year Expected Cumulative Default Rate By Sector


1-year Expected Cumulative Default Rate by Country


About the Troubled Company Index

The Kamakura Troubled Company Index® measures the percentage of 40,575 public firms in 76 countries that have an annualized one- month default risk of over one percent. The average index value since January 1990 is 14.35%. Since 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, including full model test results and parameters, is provided to subscribers. 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, the Kamakura Risk Manager. Available models 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 U.S. market.  Macro factor parameter subscriptions include Heath, Jarrow, and Morton term structure models for government securities in the U.S., Germany, the UK, Canada, Spain, Sweden, Australia, Japan, Thailand, and Singapore.  All parameters are derived in a no-arbitrage manner consistent with seminal papers by Heath, Jarrow, and Morton, as well as 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 and includes the insights of the entirety of the recent credit crisis. The 76 countries currently covered by the index are: Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, 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, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.

To follow the troubled company index and other risk commentary by Kamakura on a daily basis, please follow:

Kamakura CEO Dr. Donald van Deventer (

Kamakura President Martin Zorn(

Kamakura’s official twitter account (

About Kamakura Corporation

Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing, and software. Kamakura was recognized as a category leader in the Chartis Report, Technology Solutions for Credit Risk 2.0 2018.  Kamakura was named to the World Finance 100 by the editor and readers of World Finance magazine in 2017, 2016 and 2012. In 2010, Kamakura was the only vendor to win two Credit Magazine innovation awards. Kamakura Risk Manager, first sold commercially in 1993 and now in version 10.0.3, is the first enterprise risk management system for users focused on credit risk, asset and liability management, market risk, stress testing, liquidity risk, counterparty credit risk, and capital allocation from a single software solution. The KRIS public firm default service was launched in 2002. The KRIS sovereign default service, the world’s first, was launched in 2008, and the KRIS non-public firm default service was offered beginning in 2011. Kamakura added its U.S. Bank default probability service in 2014.

Kamakura has served more than 330 clients with assets ranging in size from $1.5 billion to $3.0 trillion. Its risk management products are currently used in 47 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, Ukraine, South Africa, Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam, and many other countries in Asia, Europe and the Middle East.

To follow risk commentary by Kamakura on a daily basis, please follow:

Kamakura CEO Dr. Donald van Deventer (

Kamakura President Martin Zorn(

K amakura’s official twitter account (

For more information, please contact:

Kamakura Corporation

2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815

Telephone: 1-808-791-9888

Facsimile: 1-808-791-9898


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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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