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Our Expected Default
Frequency™ (EDF™) credit risk measures are accurate and
forward-looking probabilities of default. They lend themselves to
precise decision-making and can be incorporated into valuation and
portfolio models. Built from decades of experience with market and
fundamental data and modeling, EDF measures have been extensively
validated on defaults and credit spreads and have become the de facto standard for lenders
and investors.
Public company EDF credit measures are based on real-time intelligence
gathered from markets around the world. A public firm's EDF credit
measure is calculated using a option theoretical framework with three
fundamental drivers: the market value of an entity's assets, its
volatility of assets, and its capital term structure. For each firm,
the EDF credit measure captures the distilled credit insight from the
equity market and combines it with a detailed picture of the company's
capital structure.
Private company EDF credit
measures are powered by the world's most comprehensive private company
database, Moody's KMV proprietary Credit Research Database® (CRD®).
Fundamental data on private firms are merged with extensive global
default database to identify the predictors of default. Our research
shows that credit risk drivers for private companies differ across
countries or sectors. To capture these differences we have created a
network of Moody's KMV RiskCalc® models that capture the fundamental
drivers of default risk for private firms across a wide array of
countries and sectors accounting for more than 75% of global GDP. Each
RiskCalc model can adjust the financial statement based measure of
default risk to reflect the current stage of the credit cycle as
measured by the EDF credit levels of public firms in the same sector
and geographic region.
RECOVERY
RESEARCH
Risk managers are concerned with both the Probability of Default and
the Loss Given Default (LGD). The LGD on a debt is impacted by
characteristics of the debt, characteristics of the issuer of the debt,
the firm's industry and the geographic region, and the stage of the
credit cycle. Moody's KMV LossCalc™ was the first commercially
available LGD model. Now on the way to its third generation, LossCalc
provides a systematic framework for lenders to evaluate the impact of
debt characteristics on recovery in the event of default. It also
facilitates computing a stressed LGD. Finally, combined with a term
structure of default probabilities, the framework can be used to
calculate the expected loss on a credit instrument.
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