Kamakura: Corporate Credit Quality Improves in October

The Kamakura Corporation’s troubled company index ended October with a decrease of 0.61% from the previous month, at 7.16%. A decrease in the index reflects improving credit quality. The index is the percentage of companies in Kamakura’s 39,000 public firm universe that have a default probability of more than 1%.

“Global economic news remains positive, with momentum building in many markets,” said Martin Zorn, president and chief operating officer for Kamakura. “While inflation remains muted, the Fed believes that the Phillips Curve holds and tighter labor markets will boost inflation in the months ahead. On the other hand, market expectations have not moved much. European economic data and sentiment remains positive and the markets have largely ignored the turmoil in Spain. These indicators all point toward increased interest rates ahead, with the possibility that rates may rise faster than market expectations.”

Volatility in the index remained low in October. At the end of the month, the percentage of companies with default probabilities between 1% and 5% was 6.02%, a decrease of 0.39% from September. At its current level, the index is at the 88th percentile of historical credit quality, with 100 being best, from January 1990 to the present. Of the 10 firms rated the riskiest, seven were from the United States and one each from Australia, Canada and Great Britain. The riskiest firm is Windstream Holdings, which has been on the troubled company list since 2014.

“In Asia, we see increases in China’s government bond yields accelerating,” Zorn continued. “This could be bad news for leveraged loans, zombie companies and low-income Americans who are leveraging to the max according to recently released data. Stress testing interest coverage protection on debt instruments should be a priority for portfolio managers in the current environment.”

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

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