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We are always interested in speaking to members of the media on news and events affecting the world of corporate credit risk. We look forward to hearing from you.
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For Immediate Release
Moody's KMV Releases Moody's RiskCalc™ for Australian Private Firms: Version 1.5
Probability of Default Model Developed from a Database of More Than 2,500 Defaults and Outperforms Publicly Available Alternatives by a Significant Margin
SAN FRANCISCO, September 12, 2002 - Moody's KMV (formerly KMV and Moody's Risk Management Services) announced today the release of Moody's RiskCalc™ for private Australian companies Version 1.5. RiskCalc is a web-based model for estimating the probability of default (PD) on obligations of non-financial private companies. RiskCalc Australia is part of the Moody's RiskCalc™ network of quantitative credit risk models for private firms. This release furthers Moody's plan to develop a globally consistent network of locally validated risk assessment models. RiskCalc now covers private firms in eleven countries worldwide, including Australia and Japan in the Asia Pacific region. The RiskCalc network provides the global lending community and corporations with an unrivalled risk management tool that can be used to benchmark risk for a single obligor or manage the credit risk of an entire portfolio.
RiskCalc probability of default estimates are used by lenders and portfolio managers to determine whether a prospective borrower meets credit-underwriting standards, and to determine whether the current spreads on loans are sufficient to add shareholder value. RiskCalc PDs are also used to assess whether capital allocation levels are appropriate, and to help assess whether middle market obligations meet credit risk benchmarks used in the secondary market for private firm commercial debt and securitizations backed by commercial debt.
The Australian model version 1.5 was developed using over 90,000 financial statements from over 29,000 Australian middle market borrowers observed between 1990 and 2001. This set of data includes over 2,500 defaulted Australian private companies, an increase of about 75% in the default data set used to develop the version 1.0 Australian model. This default database is provided by seven of Australia's largest domestic banks and is now part of Moody's worldwide Credit Research Database (CRD). The new model has uniformly more predictive power than prior Australian models across industry sectors, geographic regions, company sizes, and historical time periods.
The Australian RiskCalc model utilizes eleven financial ratios along with industry/sector designation of the firm under analysis as well as the size of the private firm. Moody's KMV chose the ratios on the basis of their stand-alone ability to predict default and for their behavior within a multivariate model. The ratios were then transformed to produce both one and five-year default probabilities that are also mapped to Moody's Investors Service's historical bond default rates. "Moody's RiskCalc produces one- and five-year PDs for corporations. The newest version of the model demonstrates significant increases in predictive power, due in part to the inclusion of industry factors and to the significant expansion in the scope and coverage of the underlying default database. The RiskCalc model can be used as a powerful tool within a bank's credit assessment system for a more risk sensitive approach," says Ahmet E. Kocagil, senior vice president and senior RiskCalc modeller at Moody's KMV.
Moody's KMV said RiskCalc has become an extremely useful benchmark providing a common language and metric among those for securitization worldwide. "We have similar business initiatives in the United States, Europe and Asia where our models have been used in the rating of dozens of collateralized debt obligations," said Roger M. Stein, managing director of research and analytics at Moody's KMV. "We believe that this effort in Australia will realize similar success. The significant added power of the new version of the model makes it well suited to internal risk management applications as well."
As is the case with RiskCalc models for other countries, the Australian model is likely to play a significant role in allowing banks to comply with new credit risk management and capital allocation regulations. The Basel Committee on Banking Supervision has recently issued documents proposing changes to the 1988 Capital Accord. The proposed changes are known as Basel Accord II. One of the key aspects of Accord II is the measurement of credit risk with banks being encouraged to differentiate borrowers and categorize their book exposures based on risk. The approach for corporate, bank and sovereign exposures in particular, involves estimation of the probability of default, loss in the event of default and expected exposure at default. The Moody's RiskCalc™ and Moody's LossCalc™ tools provide industry standard PDs and recovery estimates to help institutions address these very concerns.
About Moody’s KMV
Moody’s KMV, a wholly owned subsidiary of Moody's Corporation, is the world’s leading provider of quantitative credit risk analysis tools to lenders, investors, and corporations. Moody’s KMV's tools provide current default probabilities, recovery estimates, valuations and correlations, and are widely used to assess portfolio risk/return. Serving over 2,000 clients in 80 countries, including most of the world's 100 largest financial institutions, Moody’s KMV maintains the largest and cleanest database of corporate defaults in the world. In addition to its San Francisco headquarters, Moody’s KMV has offices around the world to serve its global customer base.
About Moody's Corporation
Moody's Corporation (NYSE: MCO) is the parent company of Moody's Investors Service, a leading provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets, and Moody's KMV, the leading provider of market-based quantitative services for banks and investors in credit-sensitive assets serving the world's largest financial institutions. The corporation, which reported revenue of $1.2 billion in 2003, employs approximately 2,300 people worldwide and maintains offices in 18 countries. Further information is available at www.moodys.com.
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