Kamakura Corporation’s troubled company index ended September with a decrease of 0.16% from the month prior. That was a decrease of 0.07% from Aug. 31. At September’s 7.77%, the index reflects the percentage of companies that have a default probability of more than 1%. An increase in the index indicates a reduction in credit quality while a decrease indicates an improvement in credit quality.
Among the 10 riskiest rated firms in September, six were from the United States, two from Great Britain, and one each from Australia and Singapore. During the month, there were seven defaults among the companies in the index.
“Credit markets continue to be stable with benign short-term indicators,” said Martin Zorn, president and chief operating officer for Kamakura. “The Kamakura expected cumulative default rate continues to point to significant warning signs in the five-to-seven-year horizon which should not be ignored.”
The riskiest rated firm, with a one-year Kamakura default percentage of 20.31%, up 10.7% during the past month, was Boart Longyear Ltd., a mineral exploration company. It is undergoing a restructuring supervised by the New South Wales Court of Appeal.
“The large jump in the default probability for Boart Longyear Ltd. seemed notable as an example of liquidity risks and restructuring risks that transcend the banking book, given the increase in lending by alternative asset managers,” Zorn said. “With the introduction of IFRS9 and later CECL, we believe that we will see more liquidity provided by alternative sources and this is an instructive study of how future restructurings may evolve.”
The Kamakura troubled company index measures the percentage of firms that have an annualized one-month default risk over 1% among a group of 39,000 public firms in 68 countries. Kamakura uses a large historical database with more than 2.2 million observations to produce a forward-looking statistical estimate of default risk 10 years into the future, with the troubled company index focusing on the short term.
– Adam Fusco, associate editor