Kamakura Troubled Company Index Shows Sharp Decline in Credit Quality in January

Location: New York
Author: Donald R. van Deventer
Date: Thursday, February 3, 2011

Kamakura Corporation reported Wednesday that the Kamakura index of troubled public companies jumped significantly in January after setting an all time low of 4.36% on December 17. The index jumped 1.49% to reach 5.94% in January after ending December at 4.45%. Of the 1.49% increase, 1.31% represents seasonal factors, because default is much more likely in the first quarter of the year than it is at other times. The Kamakura troubled company index measures the percentage of 29,400 public firms in 37 countries that have annualized 1 month default risk over on e percent. Beginning with the November 2010 index value, the Kamakura troubled company index is now based on the version 5.0 default models from Kamakura Risk Information Services. Previously, the index was reported using the KRIS version 4.1 models. The version 5 models were estimated over the period from January 1990 to December 2008 and therefore capture the key events of the credit crisis in the fall of 2008.

Kamakura's index had reached a recent peak of 22.25% in January, 2009. Credit conditions at the end of January were better than credit conditions in 93.8% of the months since the index's initiation in January 1990. This result is surprising to many. What should not be a surprise is the fact that companies in the "troubled category" are almost exclusively financial institutions or housing related firms, rather than a broad cross section of the economy. The average index value since January 1990 is 12.61%.

The all-time high in the index was 27.41%, recorded on October 31, 2001. To follow the troubled company index and other risk commentary by Kamakura on a daily basis, see www.twitter.com/dvandeventer. For a detailed comparison of Versions 5.0 and 4.1 of the index, please see this recent blog entry:

http://www.kamakuraco.com/Blog/tabid/231/EntryId/241/Introducing-the-Kamakura-Troubled-Company-Index-Version-5.aspx

In January, the percentage of the global corporate universe with default probabilities between 1% and 5% was 4.77%, an increase of 88 basis points. The percentage of companies with default probabilities between 5% and 10% was 0.83%, an increase of 43 basis points. The percentage of the universe with default probabilities between 10% and 20% was 0.27% of the universe, up 14 basis points, while the percentage of companies with default probabilities over 20% was 0.07% of the total universe in December, an increase of 4 basis points.

Martin Zorn, Chief Administrative Officer for Kamakura Corporation, said Wednesday, "Among the 2,099 firms in the KRIS corporate universe with legacy ratings, 9 firms showed increases in 1 month annualized default risk of more than one percent. Four of the firms were in Italy and two were Irish firms. The seasonal increase in the troubled company index was also accompanied by an index increase of 18 basis points on a seasonally adjusted basis."

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