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Markets continued to retreat in October, with a focus on the Federal Reserve and global geopolitical events.  The Bank of Japan announced it would consider its 1% cap on the Japanese 10-year government bond yields a reference point rather than a hard limit.  Japanese bond yields rose, and the yen fell on the news.  Chinese economic surveys showed that factory orders shrank, and construction activity accelerated their slowdown.  The European Central Bank left its main rate at 4.0%, saying data showed inflation moderating.  Earnings reports were mixed but overshadowed by rate worries.


There were fourteen defaults in our coverage universe during the month, up from eight last month.  There were nine in the U.S. and one each in Canada, China, Japan, Poland and the UK. There was also a significant jump in the expectations for future defaults across the board.


Contemporaneous credit conditions accelerated their decline in October, with the Kamakura Troubled Company Index® closing the month at 10.15%, up 0.62% from the prior month. The index measures the percentage of 42,100 public firms worldwide with an annualized one-month default probability of over 1%. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.


At the end of October, the percentage of companies with a default probability between 1% and 5% was 7.38%. The percentage with a default probability between 5% and 10% was 1.35%. Those with a default probability between 10% and 20% amounted to 0.98% of the total; those with a default probability of over 20% amounted to 0.44%.  Year-to-date short-term default probabilities ranged from a low of 7.22% on February 15 to a high of 10.48% on October 23.


Figure 1: Troubled Company Index® — October 31, 2023

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At the end of October, the riskiest 1% of rated public firms within the coverage universe included 12 companies in the U.S.  The riskiest rated firm continued to be Tupperware Brands Corporation (NYSE:TUP), with a one-month KDP of 62.2%, up 2.27% for the month.


Table 1: Riskiest Rated Companies Based on 1-month KDP — October 31, 2023

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The term structure of default provides more insight into future movements than a point-in-time view.  The shape of the curve is insightful much in the same way that analysts use yield curve differentials to drive strategies.  In Figure 2, you can see the accelerating expectations for defaults over the next three years.  If we create a forward curve, this implies an expected one-year default rate rising to 1.87%, and then to 1.90% over the three-year horizon.


Figure 2:  Expected Cumulative Default Rate — U.S. Market, 3-Year, October 31, 2023

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The Kamakura Expected Cumulative Default Rate, the only daily index of credit quality of rated firms worldwide, shows the one-year rate up 0.17% at 1.01%, with the 10-year rate up 3.0% at 9.7%.


Figure 3: Expected Cumulative Default Rate — October 31, 2023

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Stas Melnikov and Martin Zorn
SAS Institute Inc.


Through the first nine months of 2023, we have seen a surge in defaults.  One of the hardest hit sectors is healthcare.  A recent S&P release stated that the sector ‘s default risk jumped, while most others fell during the third quarter.  The KRIS® default universe mirrors that headline with 24 defaults in our coverage universe year to date.


Table 2: Year-To-Date Healthcare Company Defaults — Through September 30, 2023

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The healthcare sector is a large and complex segment of the economy, and includes pharmaceuticals, biotechnology, medical equipment, managed care and healthcare facilities, representing 18% of U.S. GDP.  In this broad spectrum, there are many variations in services provided and financial dynamics. Healthcare facilities, for instance, are a large slice of the revenue-bond market and generally carry higher yields than other segments of the municipal bond market.  KRIS® allows users to drill down on specific sectors that show high defaults or are under stress.


In addition to examining year-to-date defaults, we can look at the sector on an expected cumulative default basis. Here we can see ongoing pressure.


Figure 4: Expected Cumulative Default Rate — Health Care — October 31, 2023


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Analytical tools include spread analysis based on actively traded bonds, listing of riskiest firms in the sector based on a selected term structure, risk maps and other analytics that provide early warning or signal a firm that should be analyzed more closely on a fundamental basis.

Table 3: Bond Spread to KDP — Healthcare Sector


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Table 4: Riskiest Healthcare Firms Based on 1-Year KDP

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We are entering a critical period for defaults, with most analysts’ models predicting a rise.  History has shown that defaults tend to be concentrated in specific sectors and occur to those companies least prepared for economic turbulence.  Portfolio management rewards lenders and investors who are able to identify risks early and accurately.  Effective models also allow you to test the risk of individual defaults that could create contagion in the absence of government regulation—as we saw with the banking sector earlier this year.


About the Troubled Company Index
The Kamakura Troubled Company Index® measures the percentage of 42,100 public firms in 76 countries that have an annualized one-month default risk of over one percent. The average index value since January 1990 is 14.23%.  Since July 2022, the Kamakura index has used the annualized one-month default probability produced by the KRIS version 7.0 Jarrow-Chava reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios, stock price history, and macro-economic factors.


The KRIS version 7.0 models were developed using a data base of more than 4 million observations and more than 4,000 corporate failures. A complete technical guide, including full model test results and key parameters, is provided to subscribers. The KRIS service also includes a wide array of other default probability models that can be seamlessly loaded into Kamakura’s state-of-the-art enterprise risk management software engine, Kamakura Risk Manager. Available models include the non-public-firm default model, the U.S. bank model, and the sovereign model.  Related data includes market-implied credit spreads and prices on all traded corporate bonds traded in the U.S. market.  Macro factor parameter subscriptions include Heath, Jarrow, and Morton term structure models for government securities yields in Australia, Canada, France, Germany, Italy, Japan, Russia, Singapore, Spain, Sweden, Thailand, the United Kingdom, and the United States, plus a 13-country “World” model.  All parameters are derived in a no-arbitrage manner consistent with seminal papers by Heath, Jarrow, and Morton, as well as Amin and Jarrow.


The version 7.0 model was estimated over the period from 1990, through the Great Recession and ending in February 2022. The 76 countries currently covered by the index are Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Belize, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Hungary, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Kuwait, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Nigeria, the Netherlands, New Zealand, Norway, Oman, Pakistan, Peru, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Taiwan, Thailand, Turkey, the United Arab Emirates, Uganda, the UK, the U.S., Vietnam and Zimbabwe.


Editorial contacts:

  • Martin Zorn – . 
    • Martin Zorn currently serves as a Managing Director, Risk Reseach and Quantitative Solutions for Risk Data and Analytics initives at SAS. In his role he oversees day-to-day operations serving risk management clients.
  • Stas Melnikov – . 
    • Stas Melnikov is Head of Risk Portfolio leading teams responsible for integrated balance sheet management solutions, risk data and analytics services and center for applied quantitative finance at SAS Institute. Stas’ work has been featured in numerous industry and investor presentations, including quantitative analyses used to express pre-Global Financial Crisis warnings about the mortgage and real estate markets
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