This article is written and published by S&P Global Market Intelligence, an independent division of S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit ratings from credit ratings issued by S&P Global Ratings.
We live in uncertain and, some would say, unique times. The benign credit cycle after the global financial crisis is rapidly coming to an end as central banks halt quantitative easing programs and juggle raising interest rates to curb inflationary pressure and risks of economic recession, businesses are suffering from post-pandemic debt hangovers, energy supply/price shocks and slowing income growth, and the world is experiencing unprecedented geopolitical instabilities.
The Corporate Bond Market Distress Index (CMDI),[1] launched a few months ago by the US Federal Reserve, gives a timely signal of the functioning of the corporate bond market. The index is still well below its all-time low, but has been rising steadily since the start of 2020, suggesting greater tension in the Investment Grade (IG) segment.
Figure 1: US Corporate Bond Market Distress Index. |
Source: Federal Reserve Bank of the United States of New York. For information. (As of November 8e2022). |
In times of increasing economic, market and geopolitical turbulence, it is essential to anticipate risks and detect investment opportunities that may arise in the bond market.
In this short blog, we explain how S&P Global Market Intelligence’s credit analysis models can be used to establish an automated framework that generates early warning signals of a potential deterioration or improvement in credit risk. . You can use these signals to manage investment portfolios, reduce exposure to distressed entities, or seize opportunities well ahead of the market.
For this analysis, we used RiskGauge™, a statistical model that combines company fundamentals, market signals, industry and country specific scores, and the ranking power of issuer credit ratings. S&P Global Ratings to generate a holistic measure of credit risk for public and private companies,[2] globally, on a daily basis.
The RiskGauge score is optimized to achieve high discriminating power (around 96%),[3] but also to statistically match the S&P Global Ratings (SPGR) issuer credit ratings of the rated companies (approximately 60% will match within one notch and 80% will match within two notches).[4] We emphasize, for the avoidance of doubt, that no statistical model can predict with certainty the evolution of an SPGR issuer’s credit rating, but this historical analysis shows how The Credit Analytics RiskGauge score can be used to generate an early warning signal of possible future improvement or deterioration in credit risk.
We analyzed the discrepancies between the RiskGauge score and the SPGR rating, recording their value at the beginning of each month (in the period from January 2016 to October 2021) and checking if and how the SPGR rating changed over the 12 months following for a sample of United States. States listed companies.
Figure. 2 summarizes our empirical results. When the RiskGauge score was three or more notches higher than the SPGR issuer credit rating on a certain date, in 34% of cases we saw a rating improvement within the next 12 months, and only 5% grades were downgraded. Conversely, when the RiskGauge score was three or more notches below the SPGR issuer credit rating, in 20% of cases we experienced a rating downgrade over the next 12 months, and only 3% of grades improved. Interestingly, we also found similar results for publicly traded companies outside of the US and private companies.
Figure 2: Frequency of S&P Global Ratings issuer credit rating changes within 12 months from the date of detection of a RiskGauge score discrepancy. |
Source: S&P Global Market Intelligence, for information purposes. Based on a sample of 1,578 public enterprises (excluding financial institutions and real estate sectors). Since October 14e2022. |
If you want to learn more about RiskGauge and how you can create early warning signals of deteriorating and improving credit quality, Click here.
[1] The index incorporates a wide range of indicators, including measures of issues and prices in the primary market, pricing and liquidity conditions in the secondary market, and relative prices between traded and non-traded bonds. Source: New York Federal Reserve, 2022 (available at www.newyorkfed.org/research/policy/cmdi#/overview).
[2] S&P Global Ratings does not contribute to or participate in the creation of credit ratings generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from credit ratings used by S&P Global Ratings.
[3] Discriminatory power refers to the model’s ability to classify companies correctly, assigning lower scores to future defaulters. The number refers to the receiver operating characteristic of GR, a common measure of discriminatory power.
[4] “S&P Global Market Intelligence RiskGauge Model”, S&P Global Market Intelligence (April 2021).
This article is written and published by S&P Global Market Intelligence, an independent division of S&P Global Ratings. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence credit ratings from credit ratings issued by S&P Global Ratings.
We live in uncertain and, some would say, unique times. The benign credit cycle after the global financial crisis is rapidly coming to an end as central banks halt quantitative easing programs and juggle raising interest rates to curb inflationary pressure and risks of economic recession, businesses are suffering from post-pandemic debt hangovers, energy supply/price shocks and slowing income growth, and the world is experiencing unprecedented geopolitical instabilities.
The Corporate Bond Market Distress Index (CMDI),[1] launched a few months ago by the US Federal Reserve, gives a timely signal of the functioning of the corporate bond market. The index is still well below its all-time low, but has been rising steadily since the start of 2020, suggesting greater tension in the Investment Grade (IG) segment.
Figure 1: US Corporate Bond Market Distress Index. |
Source: Federal Reserve Bank of the United States of New York. For information. (As of November 8e2022). |
In times of increasing economic, market and geopolitical turbulence, it is essential to anticipate risks and detect investment opportunities that may arise in the bond market.
In this short blog, we explain how S&P Global Market Intelligence’s credit analysis models can be used to establish an automated framework that generates early warning signals of a potential deterioration or improvement in credit risk. . You can use these signals to manage investment portfolios, reduce exposure to distressed entities, or seize opportunities well ahead of the market.
For this analysis, we used RiskGauge™, a statistical model that combines company fundamentals, market signals, industry and country specific scores, and the ranking power of issuer credit ratings. S&P Global Ratings to generate a holistic measure of credit risk for public and private companies,[2] globally, on a daily basis.
The RiskGauge score is optimized to achieve high discriminating power (around 96%),[3] but also to statistically match the S&P Global Ratings (SPGR) issuer credit ratings of the rated companies (approximately 60% will match within one notch and 80% will match within two notches).[4] We emphasize, for the avoidance of doubt, that no statistical model can predict with certainty the evolution of an SPGR issuer’s credit rating, but this historical analysis shows how The Credit Analytics RiskGauge score can be used to generate an early warning signal of possible future improvement or deterioration in credit risk.
We analyzed the discrepancies between the RiskGauge score and the SPGR rating, recording their value at the beginning of each month (in the period from January 2016 to October 2021) and checking if and how the SPGR rating changed over the 12 months following for a sample of United States. States listed companies.
Figure. 2 summarizes our empirical results. When the RiskGauge score was three or more notches higher than the SPGR issuer credit rating on a certain date, in 34% of cases we saw a rating improvement within the next 12 months, and only 5% grades were downgraded. Conversely, when the RiskGauge score was three or more notches below the SPGR issuer credit rating, in 20% of cases we experienced a rating downgrade over the next 12 months, and only 3% of grades improved. Interestingly, we also found similar results for publicly traded companies outside of the US and private companies.
Figure 2: Frequency of S&P Global Ratings issuer credit rating changes within 12 months from the date of detection of a RiskGauge score discrepancy. |
Source: S&P Global Market Intelligence, for information purposes. Based on a sample of 1,578 public enterprises (excluding financial institutions and real estate sectors). Since October 14e2022. |
If you want to learn more about RiskGauge and how you can create early warning signals of deteriorating and improving credit quality, Click here.
[1] The index incorporates a wide range of indicators, including measures of issues and prices in the primary market, pricing and liquidity conditions in the secondary market, and relative prices between traded and non-traded bonds. Source: New York Federal Reserve, 2022 (available at www.newyorkfed.org/research/policy/cmdi#/overview).
[2] S&P Global Ratings does not contribute to or participate in the creation of credit ratings generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from credit ratings used by S&P Global Ratings.
[3] Discriminatory power refers to the model’s ability to classify companies correctly, assigning lower scores to future defaulters. The number refers to the receiver operating characteristic of GR, a common measure of discriminatory power.
[4] “S&P Global Market Intelligence RiskGauge Model”, S&P Global Market Intelligence (April 2021).