EDF Case Studies

Angang Steel (Ansteel) is one of China’s largest steel producers, but in recent times slower economic growth, coupled with elevated steel production, have put downward pressure on prices and revenues. Ansteel’s Expected Default Frequency (EDFTM) has been steadily increasing since mid-2015 as the company’s financial risk, as measured by its market leverage, has risen.

Authors: Irina Baron, Glenn Levine
Date: June 23, 2016

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China Rongsheng Heavy Industries Group Holding Ltd. does not have traded bonds or CDS from which to observe credit spreads, and is not rated by Moody’s Investors Service. However, the Moody’s Analytics public EDF measure effectively captured and quantified changes in the company’s risk of default prior to the credit event recorded on July 2, 2013.

Author: Irina Baron
Date: January 14, 2014

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Over the past year OGX Petroleo e Gas Participacoes S.A., once Brazil’s second-biggest oil company, has struggled to finance its offshore field production and is considering a debt restructuring. The key reason for OGX’s poor performance is below expectation offshore production rates, caused by higher than anticipated geological complexity of its wells. The firm is a member of the EBX Group, an industrial group founded and under the leadership of Brazilian entrepreneur Eike F. Batista, who, in an attempt to cut capital spending, has already closed three offshore oil prospects.

Author: Irina Makarova
Date: July 12, 2013

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Penson, once a major handler of securities trades for U.S. brokerages, failed at attempts to restructure its debt and operations through the sale or transfer of its operating businesses, and amidst liquidity concerns voluntarily filed for Chapter 11 bankruptcy on January 11, 2013. Penson’s one-year public EDF measure proved to be a reliable predictor of financial distress. 

Author: Irina Makarova 
Date: June 06, 2013

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In April 2013, Urbi Desarrollos Urbanos, S.A.B. reported quarterly earnings of MXN 461 million, which was 85% below the previous year’s first quarter results. Since then the company has defaulted on its loans and has hired investment bank Rothchild as a financial adviser to consider a debt restructuring. The negative momentum in Urbi’s EDF measure and its underperformance relative to its peers, separates Urbi as one of the riskiest firms among its industry competitors. 

Author: Irina Makarova 
Date: May 23, 2013

 

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Despite the complexities of the Suntech situation – the rapidly changing economics of the solar technology industry, the company’s evolving capital structure, and the unexpected departure of Chinese authorities from historical precedent – Moody’s Analytics’ EDF model provided a powerful early-warning tool, signaling rising credit risk at the company starting in 2008. The absolute level of Suntech’s EDF measure, together with its elevated risk level relative to its industry peers, offered clear indications of the significant financial challenges facing the company. 

Authors: Irina Makarova, David Munves CFA., David T. Hamilton PhD
Date: April 18, 2013

 

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Olam’s probability of default has jumped significantly since the start of year, from 0.2% to its current level of 1.17%, suggesting heightened risk of a credit event. The firm’s low margins, increasing debt levels to fund agricultural investments, liquidity concerns, and a deteriorating market capitalization, all indicate that the firm’s probability of a credit event has increased.

Author: Irina Makarova 
Date: December 19, 2012

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Although the performance of Facebook’s shares has received enormous attention from investors and the financial media, its credit quality has received no notice. This is due to the fact that it is an unrated company and has no public bonds or credit default swaps from which to infer its credit risk.

Author: Irina Makarova and David. T. Hamilton, PhD
Date: November 7, 2012

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Earlier this year Sharp’s EDF measure began to trend in a range suggesting very heightened risk of default. The firm’s weak liquidity, substantial operating losses, and heightened EDF measure – equivalent to a Ca implied rating – indicates that the likelihood of a credit event in the near future remains high.

Author: Irina Makarova
Date: November 16, 2012

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Through much of its history Best Buy was considered one of the most successful retail stores in the US. However, since 2010, the electronics retailer has faced business and financial challenges that are placing increasing pressure on its credit quality.

Author: Irina Makarova and David. T. Hamilton, PhD 
Date: October 2, 2012

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Since Groupon reported a fourth-quarter 2011 loss of USD 9.8 million on an adjusted basis, Moody’s Analytics’ public EDF measure had increased from 0.04% to 2.71% as of August 16, 2012. The sharp increase in its EDF measure was driven by changes in both its market leverage (financial risk) and asset volatility (business risk).

Author: Sai Mao and Irina Makarova 
Date: August 17, 2012

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Peugeot’s declining credit quality is due to increases in both the company’s business risk and its financial risk, which are reflected in the respective drivers of the public-firm EDF measure: asset volatility and market leverage.

Author: Jerry H Tempelman, CFA 
Date: August 9, 2012

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RIM does not have traded bonds or CDS from which to observe credit spreads, and is not rated by Moody’s Investors Service. However, Moody’s Analytics’ public EDF measure effectively captures and quantifies changes in the company’s credit risk.

Author: Irina Makarova and David. T. Hamilton, PhD 
Date: June 22, 2012

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The EDF measure for Shanghai Zendai has largely tracked its peer group, China Real Estate Group, prior to March 2011. But since then its EDF has risen at a much faster pace than its peers.

Author: Zhao Sun, PhD, CFA
Date: June 13, 2012

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The EDF measure for Shandong Helon Co. has signaled a high level of default risk since the time of the financial crisis in 2008. In 2010 its EDF measure began to trend in a range suggesting heightened risk of default, and in June 2011 its EDF jumped from 2.6% to over 7%.

Author: Irina Makarova and David. T. Hamilton, PhD 
Date: May 31, 2012

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Bankia SA’s one-year probability of default jumped sharply in May, from 0.45% at the start of the month to 2.24% as of May 24. The rapid decline in Bankia’s financial and operating performance led the Spanish government to partially nationalize the bank.

Author: David Hamilton & Irina Makarova 
Date: May 25, 2012

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Upon the conclusion of an exchange of EUR 177 billion of Greece’s sovereign debt on March 9, 2012, ISDA declared that the exchange constituted a credit event under the terms of its credit default swaps. The 5-Year Sovereign EDF for Greece shows the long and accelerating road to default.

Author: Irina Makarova and David Hamilton
Date: March 23, 2012

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WYG does not have any credit risk measures like bond or CDS spreads available, and it is not rated by Moody’s Investors Service. However, the public EDF measure is able to capture and quantify changes in the company’s risk of default.

Author: Irina Makarova
Date: March 7, 2012

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LinkedIn is an unrated company, and does not have any traded bonds or CDS. However, we can calculate probabilities of default for the company using Moody’s Analytics’ public EDFTM model, which utilizes equity prices and liability information.

Author: Irina Makarova and David T. Hamilton
Date: March 7, 2012

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Clearwire’s one-year EDFTM (Expected Default Frequency) metric worsened by 567% over the past year, from 2.64% to 17.61% as of February 22.

Author: Robert Eckerstrom
Date: February 27, 2012

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Following news reports that Diamond Foods made unaccounted payments to its walnut growers in late September 2011, investors raised questions about the validity of Diamond Foods’ earnings reports of USD 680 million and USD 966 million in 2010 and 2011, respectively. The company is being sued by shareholders who claim that the payments may have been used to shift costs from one fiscal year to the other with the intent of artificially inflating its earnings and boosting its stock price.

Author: Irina Makarova and David T. Hamilton
Date: February 22, 2012

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Olympus Corporation is a Japan-based manufacturer of optics, photography and reprography products. In early November 2011, the company admitted a cover-up over nearly two decades of investment losses and the use of several acquisitions to hide the losses. Olympus will hold an extraordinary shareholders meeting on April 20, and by mid-March a new management will be selected to decide on the future direction of the company.

Author: Irina Makarova
Date: February 17, 2012

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Although the financial problems of Petroplus Holdings were well known by investors, the public EDF measure captured and quantified the sudden changes in the company’s risk of default.

Author: Irina Makarova
Date: February 2, 2012

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Kodak’s one-year EDFTM (Expected Default Frequency) metric began to show signs of significant distress for the company in 2009, with the trend accelerating rapidly in 2010 and early 2011. Moreover the company’s EDF has underperformed its industry average, highlighting the idiosyncratic problems at Kodak since the beginning of 2010.

Author: Robert Eckerstrom
Date: January 19, 2012

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The trend of Sears Holdings’ pubic EDF measures indicates that the company has been experiencing increasing financial strain and rising risk of default. The company’s public EDF measure has been underperforming its industry sector since 2008, and its EDF measure currently stands above the 90th percentile of its industry, signaling a relatively high risk of default compared to its peers.

Author: Irina Makarova
Date: January 12, 2012

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On November 29, 2011, American filed for Chapter 11 bankruptcy protection with $4 billion in cash, with the intent of financing its restructuring process without external assistance.

Author: Irina Makarova and David Hamilton
Date: December 8, 2011

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MF Global Holdings’ bankruptcy in October 2011 was unexpected by many investors. However, its public EDF measure signaled that the company was relatively risky versus its industry peers, and gave advance warning of increasing default risk several months in advance of its bankruptcy filing.

Author: Irina Makarova 
Date: December 1, 2011

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On July 1, 2011, Carrefour spun-off its Spanish-based discount retailer DIA. Shareholders received one share of DIA for each share of Carrefour. On July 5 Carrefour’s share price dropped to reflect the spinoff. The EDF™ (expected default frequency) measure jumped from 0.16 to 0.22. However, when the EDF value on July 5 reflected the change in market capitalization from the drop in equity price, the liabilities for Carrefour still included the liabilities of DIA.

Author: Daniel P. Coker
Date: July 25, 2011

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Nokia’s one-year EDFTM (Expected Default Frequency) metric worsened (rose) by 223% over the past four months, from 0.46% on February 11 to 1.49% on June 8. Notably, it increased from 0.78% to 1.49% in the first week of June alone, after the company announced on May 31 that it had lowered management projections for revenues, earnings, and cash flow for the quarter and discontinued giving full year projections.

Author: Robert Eckerstrom
Date: June 16, 2011

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The recent recession, following on the gradual credit deterioration of the major US automotive companies over the prior ten years, proved too much for GM and Chrysler, both of which filed for bankruptcy in the second quarter of 2009. Although Ford came close, it escaped the same fate, and its fortunes have clearly improved since then. Moody’s has increased Ford’s senior unsecured rating by seven notches, from Ca with a negative outlook in the summer of 2009 to Ba3 with a positive outlook today.

Author: Jerry H. Tempelman, CFA
Date: March 9, 2011

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