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Kamakura Corporation announced Tuesday that the Kamakura index of troubled public companies made its fifth consecutive dramatic improvement in August after reaching a peak of 24.3% in March. The month on month rate of recovery has actually accelerated. Kamakura global index of troubled companies dropped 2.3 percentage points to 12.4% of the public company universe in August compared to a 1.7 percentage point drop to 14.7% in July.
Kamakura defines a troubled company as a company whose short term default probability is in excess of 1%. Credit conditions are now better than credit conditions in over half of the months since the index’s initiation in January 1990, and 1.3 percentage points better than the index’s historical average of 13.7%. In March, by contrast, credit conditions were better than only 3.6% of the monthly periods since 1990. The all-time low in the index was 5.4%, recorded in April and May, 2006, while the all-time high in the index was 28.0%, recorded in September 2001. The index is based default probabilities for 26,951 companies in 30 countries. The absolute number of companies in the “over 20%” default probability category declined by 38 firms to 258. .
In August, the percentage of the global corporate universe with default probabilities between 1% and 5% decreased by 1.4 percentage points to 8.4%. The percentage of companies with default probabilities between 5% and 10% was down 0.5 percentage points to 1.8% of the universe in July. The percentage of the universe with default probabilities between 10 and 20% was down 0.2 percentage points to 1.3% of the universe. The percentage of companies with default probabilities over 20% was down by 0.1 percentage points to 1% of the total universe in August. In March, by contrast, 3.1% of the total universe had default probabilities over 20%.
Kamakura’s president Warren A. Sherman said Monday, “The index’s return to its historical average levels is an excellent sign. However, there are still many individual credits that deteriorated during the month of August. The rated public companies showing the sharpest rise in short term default risk in August were Princeton Consulting and Services (USA), Ambrilia Biopharma Inc. (Canada), Open Interface Inc. (Japan), and MDR Limited (Singapore). “
The Kamakura index uses the annualized one month default probability produced by the best performing credit model of the Kamakura Risk Information Services default and correlation service. The model used is the fourth generation Jarrow-Chava reduced form default probability, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors. The countries currently covered by the index include Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan, Luxemburg, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, United Kingdom, and the United States.