Despite concerns about the US defaulting on its debt, a choppy Chinese economy, and ongoing economic woes in Western Europe, S&P Capital IQ says that credit risk levels have dropped off globally over the last year and the most, perhaps surprisingly, in Western Europe.
The findings were published in the inaugural issue of “Credit Market Pulse,” a bimonthly publication from S&P Capital IQ that’s aimed at providing credit officers with insight into corporate default trends that could impact their suppliers and corporate customers across the globe and closer to home. The publication is divided into sections providing the median probability of default (PDs) for four main global regions, another for the S&P 500 equity index and its sub-indices, and the third for specific companies meriting attention.
The median PD for North American companies on Oct. 30 was 0.03 percent, a third of the median PD a year earlier, while the median fell by nearly three quarters in Western Europe, to 0.05 percent from 0.19 percent. The median PD for companies in Asia Pacific (APAC) mature economies, including Australia, Hong Kong, Japan, and Singapore, barely changed over the same period, to 0.18 percent from 0.19 percent.
“These economies suffer most from the interdependence with slowing growth rates of China and India and rising uncertainty of the emerging market economies in Asia overall,” the report noted.
Unsurprisingly, the median PD level of the developing BRIC economies—Brazil, Russia, India and China—were the highest at the end of October, at 1.64 percent, down from 1.92 percent the month before and from 1.99 percent a year earlier. “The stickiness of the median PD around 2 percent over the last two years can be explained by the structural problems in all four countries that remain unresolved and have led to slower GDP growth than expected and rising inflation rates in Brazil, Russia and notably India,” the report said.
The publication uses the rating agency division’s proprietary Market Signals model to calculate PD. Thomas Yagel, a director at S&P Capital IQ, said the Market Signals model uses the Merton distance-to-default method at its core, and builds on it with features such as accounting for country risk. “It’s also been calibrated on data that includes the most recent financial crisis, so we think our PD model is a cutting edge PD model, and it’s the basis for all the data in the report,” Mr. Yagel said.
Mr. Yagel added that data in the report applies to companies with at least $500 million in revenue because North America has many smaller companies reporting equity information, and those companies’ additional risk would distort comparisons across regions.
The report notes that the PD of companies in the S&P 500 remained low over the previous year, under 0.1 percent, although a few sector bucked the norm considerably. Telecom, for example, approached at PD of 1 percent toward the end of 2012 and remained well above other sectors until September of this year, when its PD fell to about 0.1 percent, joining consumer discretionary and materials stocks at the riskier end of the sector pack.
Those sectors relatively high PDs were elevated by events such as the bankruptcy in June by Exide Technologies, a major producer, distributor and recycler of lead-acid batteries, and J.C. Penny’s PD spike to 39.6 percent On Oct. 26 that resulted in part from its continuous store-sale declines, the report says.
Although median PD was lowest in North America, the region reported the highest PDs for specific companies over the two-month period prior to Oct. 30, such as NII Holdings at 28.32 percent. The BRIC’s Ruchi Soya Industries followed closely behind at 25.92 percent, while the highest PD for APAC mature economies was Sharp Corp.’s 12.53 percent, and in Western Europe it was Air Berlin at 6.74 percent.
The report also notes the three companies experiencing the greatest decreases and the three with the greatest increases in PD for each of the regions, and for the most part they were scattered across industries. “We thought it was interesting that all three of the companies experiencing the greatest PD deteriorations in North America were in the healthcare sector, given the debate in Washington has been so healthcare related,” Mr. Yagel said.