Risk Insight Video & Blog Series: Credit Risk Assessment Using Bank Scorecards

Topic 1: PD Market Signals Model (PDMS)

The PD Market Signals Model is an analytical tool offered by S&P Global Market Intelligence that produces a probability of default over a 1- to 5-year horizon for all public corporates and financial institutions globally. Among the enhancements to the traditional equity–based “structural framework”, this model explicitly incorporates Country and Industry Risk dimensions.

I already discussed the importance of Industry Risk in the analysis of counterparties in a previous issue of this series, entitled“What’s Driving the Oil and Gas Industry Credit Slide?”. At that time, I concluded that the current Oil and Gas industry environment combines a steeper-than-average cyclical downturn with a permanent shift in industry dynamics.

Topic 2: PDMS for 7 Defaulted, Rated Oil and Gas Entities 

Since the beginning of 2016, 42 Oil and Gas companies declared bankruptcy, according to data from the S&P Capital IQ platform. Of these, 7 had a public rating from S&P Global Ratings of “CCC” or above as of 6 months ago.

To see the “slippery slope” or, more specifically, the path to default of these 7 companies, I plotted their average market-implied probability of default given by the PD Market Signals model against the price of oil for the last 12 months.

The date is on the horizontal-axis. Average probability of default is on the left-hand axis, plotted in Red. Price of oil is on the right-hand axis, plotted in Teal.

• We see that between June 2015 and January 2016, the price of oil dropped by over a factor of 2 while the average probability of default increased by a factor of 5.
• Since then, oil experienced a moderate rebound, trading around $50 a barrel in early June.
• However, despite a slight improvement between February and March 2016, the average PD increased 3-fold in less than 3 months – reaching 100% - representing a default. Looking back, it appears that the increased leverage and strained cash flows was too great for these 7 companies to recover. The steep deterioration in market-implied probability of default observed for these selected Oil and Gas companies highlights the necessity of a robust screening and monitoring tool.

A Single Solution For Your Credit Analysis Needs:

Credit Analytics on the S&P Capital IQ platform addresses the time, data integrity, and information gaps encountered when analyzing and monitoring the creditworthiness of counterparties and investments. Request a demo of Credit Analytics to learn how you can overcome challenges when dealing with unrated, public and private companies, a myriad of counterparties, and inconsistent data.

Check back here each month to read the latest Risk Insight blog and watch the video.