Credit Quality for Public Firms Grew in March, but Watch for Longer-Term Default Risks

Overall corporate credit quality improved in March as the Kamakura Corporation’s troubled company index decreased from the prior month. The troubled company index was at 8.15% in March and at the 81st percentile of historical credit quality (with 100 being the best of all time) from January 1990 to the present.

The index reflects the percentage of the Kamakura 38,000 public firm universe that has a default probability over 1.00%. A rising index indicates declining credit quality and vice versa. The percentage of the firms tracked by the index with default probabilities between 1% and 5% decreased in March, as did the percentage of firms with default probabilities between 5% and 10% and those with default probabilities over 20%. Those companies with default probabilities between 10% and 20% were mostly flat for the month. Overall volatility in the numbers was low as well.

Trade creditors should continue to watch for signs of distress coming from troubled retailers, as the two tracked American defaults in March were discount retailers Gordman’s and HHGregg, Kamakura said. During March, there were 18 overall defaults tracked in the index, with four from Brazil, three from Russia and two each from Australia, Great Britain and the U.S. Among the 10 riskiest rated firms, five were from the U.S., two from Great Britain and one each from France, Greece and Spain. Walter Investment Management Group was the riskiest rated firm with a one-year default probability of 15.02%, up 6.54% from the prior month.

Over the longer term, Kamakura analysis shows default rates dramatically expanding on the five- to seven-year time horizon, even for blue-chip firms. This expansion is particularly significant given new issuance of high-grade debt in the five- to seven-year window both in 2016 and 2017, said Martin Zorn, president and COO for Kamakura Corporation. Kamakura’s anticipated 10-year cumulative default rate among 2,577 rated firms is 13.44%, higher than the 13.33% rate expected in September 2008 when Lehman failed.

“One of the risk management lessons learned during my tenure at the Winston-Salem-based Wachovia was that excellent credit management was earned through portfolio management and the early identification of problems,” Zorn said. “The term structure of default is a critical tool in the early identification of potential future problems.”

– Nicholas Stern, senior editor

Kamakura Chairman and CEO Donald R. van Deventer, Ph. D., will speak about using big data and computer power to supplement careful credit analysis at NACM’s 121st annual Credit Congress & Expo in Dallas, TX, June 11-14.

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