Kamakura Corporation reported Wednesday that the Kamakura index of troubled public companies made a third consecutive dramatic improvement in June after reaching its worst point, 24.3%, in the current recession in March. The Kamakura global index of troubled companies decreased by 2.4 percentage points to 16.4% of the public company universe in June. 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 30.4% of the months since the index’s initiation in January 1990. 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 on expanded coverage of more than 26,900 companies in 30 countries, an increase of 400 firms since the previous month. In spite of the increase in coverage, the absolute number of firms in the “over 20%” default probability category declined by 98 firms to 380.
Kamakura’s president Warren A. Sherman said Wednesday, "In recent press releases, Kamakura identified Eddie Bauer Holdings and Barzel Industries as showing very high increases in default risk. Both firms defaulted in June. During the month of June, the rated public companies showing the sharpest rise in short term default risk were Sistema JSFC, Radio One, McClatchy, and Entravision Communications. In June, the percentage of the global corporate universe with default probabilities between 1% and 5% decreased by 1.3 percentage points to 10.7%. The percentage of companies with default probabilities between 5% and 10% was down 0.3 percentage points to 2.7% of the universe in June. The percentage of the universe with default probabilities between 10 and 20% was down 0.4 percentage points to 1.6% of the universe. The percentage of companies with default probabilities over 20% was down sharply by 0.4 percentage points to 1.4% of the total universe in June."
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.
Kamakura ceo Dr. Donald R. van Deventer and other members of Kamakura senior management also maintain an active blog on key risk management issues. Recent blog entries include the following stories:
• Risk Management Strategies for Individual Investors, Part 4: Home Prices and Inflation
• Risk Management Strategies for Individual Investors, Part 5: More on Home Prices and Inflation
• Chief Risk Officers, Failure, and Risk Manager of the Year
• Credit Portfolio Models: The Reduced Form Approach
• Lessons from Failures of Silo Risk Management: Countrywide Financial, Update 3
• Using CDS Spreads and Default Probabilities for Best Relative Value Credit Investments
• The Chief Risk Officer and the Board of Directors: What is the Right Relationship
• Mapping Credit Models to Actual Defaults: Key Issues and Implications
• Risk Management Model Validation: Checklist and Procedures
• Procyclicality: A Real Issue or a Buzzword?
• Does a Rating or a Credit Score Add Anything to a Best Practice Default Model?
• “Put Options and Capital Adequacy: Evidence from the Options Market
• Where are the Risk Management Experts on Bank Boards
• Comments on Structured Credit: Value Master 2008-1 from Korea
• Hedging Credit Risk with Macro Factor Derivatives
• The U.S. Consumer Financial Protection Agency: Do We Need Government to Save Us From Ourselves
• The SEC’s Money Market Fund Proposals and “Breaking the Buck”