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Goldilocks Loses: Kamakura Troubled Company Increases By 1.90% To 5.30%

Dec. 01, 2021 1:44 PM ETCodere, S.A. (CODEF)
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Bonds, Portfolio Strategy, Banks, risk management

Seeking Alpha Analyst Since 2009

Donald R. van Deventer is a Managing Director in the Center for Applied Quantitative Finance at SAS Institute, Inc. Prior to the acquisition of Kamakura Corporation by SAS on June 24, 2022, Dr. van Deventer was the Chairman and Chief Executive Officer of Kamakura Corporation. He founded the Kamakura Corporation in April, 1990. The second edition of his book, Advanced Financial Risk Management (with Kenji Imai and Mark Mesler) was published in 2013.  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.


  • Kamakura President Martin Zorn is the author of Kamakura's monthly credit conditions update.
  • Credit quality remains strong but drops to the 97th percentile of the period 1990 to 2021. 100 indicates best conditions.
  • 11 of the 20 riskiest firms world-wide are based in China.

NEW YORK, December 1, 2021: In September, our monthly credit conditions release was entitled “Cassandra vs. Goldilocks.” In a “Goldilocks” outcome, supply chain bottlenecks would disappear and no new Covid variants would arise. Clearly, that hasn’t happened. As we enter December, supply bottlenecks are still with us and we are trying to determine the implications of the Omicron Covid strain.

The Kamakura Troubled Company Index® indicates that credit quality remained low by historical measures but increased in November to 5.30% compared to 3.40% last month. Volatility increased with default probabilities ranging from 3.25% on November 3 to 5.31% on November 26.  Over the past year, the index has declined by 8.68%.  The low was set on August 12, at 2.06%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

At the close of November, the percentage of companies with a default probability between 1% and 5% was 4.52%, an increase of 1.37% from the previous month. The percentage with a default probability between 5% and 10% was 0.65%, an increase of 0.44%. Those with a default probability between 10% and 20% amounted to 0.11% of the total, representing an increase of 0.07%; and those with a default probability of over 20% amounted to 0.02%, an increase of 0.02% over the prior month. This level shows that worldwide corporate credit quality is at the 97th percentile for the period of 1990 to 2021, with 100 indicating “best conditions.”

Figure 1: Troubled Company Index — November 30, 2021

Among the 20 riskiest-rated firms listed in November, 11 were in China, with five in the U.S. and one each in Luxembourg, Mexico, Norway and Spain. The riskiest-rated firm remained Codere S.A. (CDR), a Spanish consumer services and gaming company.  The firm had a one-month KDP of 21.92%, up 8.30% from the previous month. There were four global defaults in the Kamakura coverage universe, two of which occurred in the U.S. and one each in China and Germany.

Table 1: Riskiest-Rated Companies Based on 1-Month KDP – November 30, 2021

The Kamakura Expected Cumulative Default Rate, the only daily index of credit quality of rated-firms worldwide, shows the one-year rate up 0.60% at 1.40%, and the 10-year rate down 0.89% at 19.15%. The shift results in an increase in near-term expected defaults.

Figure 2: Expected Cumulative Default Rate — November 30, 2021


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

November began with markets debating inflation data and how quickly and aggressively central banks will respond. The markets also focused on who would be nominated as the Federal Reserve chair and how the European Central Bank will respond to inflation numbers across Europe, especially in Germany. Another significant concern was whether Evergrande would make its November bond payment prior to the expiration of its grace period to avoid default – and fortunately, it did.

In the U.S., President Biden signed the $1 trillion infrastructure bill into law and the U.S. House of Representatives passed the President’s “Build Back Better” plan, sending the roughly $2 trillion social spending and climate bill to the Senate, where it is unlikely to pass in its current form.  In other words, most of November seemed like business as usual, or at least usual in terms of the new normal.

Then came Black Friday. The day is traditionally the start of Christmas shopping season in the United States, although with all the warnings of the supply chain mess, one must wonder whether shoppers started at Halloween this year. As it happens, the date was marked by the announcement of a new Covid variant called Omicron (I will leave the discussion of what happened to the Greek letters “Xi” and “Nu” for cocktail discussions).

Politicians, investors and lenders are now trying to discern what the emergence of this new strain means for markets, public policy and vaccines.  While its impact could be significant, there are too many unknowns to speculate about at this point, so our concerns must remain focused on the economic effects of fiscal and monetary policy, especially its unintended consequences.

Inflation continues to pressure central banks to take action before it becomes too late.  There is no doubt that after a long structural cycle of falling rates, we will see them rise again. Even with an increase, rates will remain low by historical standards, though they will seem high to many of the traders and lenders in today’s markets. Inflation is a puzzle more than a debate – it has proven to be unpredictable and stubbornly hard to contain once it gets going. The traditional anecdote says the Federal Reserve takes away the punch bowl just when the party is getting good. But one must wonder if this time, they plan on pulling it only after the effects of a hangover set in.

I would argue that a rise in short-term defaults is actually a good signal, as the lack of that red flag has created underwriting and trading activity likely to mask a bigger shakeout down the road. An increase in short-term default rates and a reduction in the expected longer-term cumulative defaults could in fact bode well for markets.

The best indicator of inflation is the medium-term Treasury markets, and the best indicator of default risk is the bond markets. I closely follow our CEO Dr. Donald van Deventer’s daily blog Corporate Bond Investor in this regard to examine the daily attribution of risks as they relate to changes in bond prices. Table 2 below shows the one-month attribution as of November 30, 2021.

Table 2: Bond Performance Attribution – November 30, 2021

Dr. van Deventer’s analysis provides insights into whether it is systemic risk (as measured by Treasury-related changes) or company-specific risks (as measured by credit-related changes) that are driving the price changes. The bond market has a strong track record for providing insight about future economic growth.

About the Troubled Company Index

The Kamakura Troubled Company Index® measures the percentage of 40,500 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.

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 10.1, 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 $7.0 trillion.  Current clients have a combined “total assets” or “assets under management” in excess of $34 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 ( www.twitter.com/dvandeventer)

Kamakura President, Martin Zorn( www.twitter.com/riskmgrhi)

Kamakura’s official twitter account ( www.twitter.com/KamakuraCo).

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

Information: info@kamakuraco.com

Web site: www.kamakuraco.com

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

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