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CAPITAL MARKETS: Moody's KMV in defaults warning
Source: Financial Times
Date: November 26, 2002
Author: Jenny Wiggins
Debt investors hoping for a brighter outlook in the troubled US capital markets could instead be in for more gloom.
One in 20 US companies will default on its securities in the next 12 months, according to Moody's KMV. Investors in senior unsecured bonds of industrial companies that default can expect to lose, on average, 66 per cent of their principal, the company said.
Although the likelihood of a US company defaulting on its debt has recently begun to fall after peaking at record levels, default probabilities are still five times higher today than in the mid-1990s. They are also at more than twice the levels seen in the 1991 recession.
Analysts use historical averages to predict recovery rates but Moody's KMV claims that LossCalc, its new market-based product for estimating losses in the event of default, is more highly correlated with actual losses.
"History would suggest losses of 50 cents on the dollar but we are observing losses of 80 cents or higher," said Tim Kasta, Managing Director of Moody's KMV.
Mr. Kasta said investors needed to be more active managers and take action on deteriorating credits.
"The importance of selling deteriorating credits early and diversifying your portfolio has never been more critical," he said.
LossCalc, aimed at commercial banks, insurance companies and asset managers, is designed to estimate how much a creditor would lose if a borrower or counterparty defaulted.
Copyright: The Financial Times Limited 1995-2002
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