Corporate Credit Scoring Models for U.S. and Global Credit ...ealtman/CorpCrScoringModels.pdf · 1 Dr. Edward Altman NYU Stern School of Business. Corporate Credit Scoring Models

1111

Dr. Edward AltmanNYU Stern School of Business

Corporate Credit Scoring Models for U.S. and Global Credit Markets

Corporate Bankruptcy & ReorganizationFINC-GB.3198.01Fall 2016

Scoring Systems

2

• Qualitative (Subjective)

• Univariate (Accounting/Market Measures)

• Multivariate (Accounting/Market Measures)– Discriminant, Logit, Probit Models (Linear, Quadratic)– Non-Linear Models (e.g.., RPA, NN)

• Discriminant and Logit Models in Use– Consumer Models - Fair Isaacs– Z-Score (5) - Manufacturing– ZETA Score (7) - Industrials– Private Firm Models (eg. Risk Calc (Moody’s), Z” Score)– EM Score (4) - Emerging Markets, Industrial– Other - Bank Specialized Systems

3

Scoring Systems(continued)

• Artificial Intelligence Systems– Expert Systems– Neural Networks (eg. Credit Model (S&P), CBI (Italy))

• Option/Contingent Claims Models– Risk of Ruin– KMV Credit Monitor Model

• Blended Ratio/Market Value Models– Moody’s Risk Cal– Bond Score (Credit Sights)– Z-Score (Market Value Model)

• Z-Metrics (MSCI)– Blended and Macro Approach

44

Major Agencies Bond Rating Categories

Moody's S&P/Fitch

Aaa AAAAa1 AA+Aa2 AAAa3 AA-A1 A+A2 AA3 A-

Baa1 BBB+Baa2 Investment BBBBaa3 Grade BBB-Ba1 High Yield BB+Ba2 ("Junk") BBBa3 BB-B1 B+B2 BB3 B-

Caa1 CCC+Caa CCC

Caa3 CCC-Ca CC

CC D

4

5

1978 – 2016 (Mid-year US$ billions)

Size of the US High-Yield Bond Market

Source: NYU Salomon Center estimates using Credit Suisse, S&P and Citi data.

$1,656

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,80019

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

16

$ (B

illio

ns)

6

Key Industrial Financial Ratios (U.S. Industrial Long-term Debt)

Source: Standard & Poor’s, CreditStats: 2011 Industrial Comparative Ratio Analysis, Long-Term Debt –US (RatingsDirect, August 2012).

Medians of Three- Year (2009-2011) Averages AAA AA A BBB BB B CCC*

EBITDA margin (%) 27.9 27.6 20.4 19.7 17.6 16.6

Return on Capital (%) 30.6 23.6 20.7 13.2 10.9 7.8 2.7

EBIT Interest Coverage(x) 33.4 14.2 11.6 5.9 3.0 1.3 0.4

EBITDA Interest Coverage (x) 38.1 19.6 15.3 8.2 4.8 2.3 1.1

Funds from Operations/Total Debt (%) 252.6 64.7 52.6 33.7 24.9 11.7 2.5

Free Operating Cash Flow/Total Debt (%) 208.2 51.3 35.7 19.0 11.1 3.9 (3.6)

Disc. Cash Flow/Debt (%) 142.8 32.0 26.1 13.9 8.8 3.1

Total Debt/EBITDA (x) 0.4 1.2 1.5 2.3 3.2 5.5 8.6

Total Debt/Total Debt + Equity (%) 14.7 29.2 33.8 43.5 52.2 75.2 98.9

No. of Companies 4 14 93 227 260 287

* 2005-2007

7

Key Industrial Financial Ratios (Europe, Middle East & Africa Industrial Long-term Debt)

Source: Standard & Poor’s, CreditStats: 2010 Adjusted Key US & European Industrial and Utility Financial Ratios (RatingsDirect, August 2011).

Medians of Three- Year (2008-2010) Averages AA A BBB BB B

EBITDA margin (%) 24.9 16.6 15.5 17.6 16.3

Return on Capital (%) 20.0 15.3 11.2 9.3 6.7

EBIT Interest Coverage(x) 15.7 7.0 3.9 3.1 1.0

EBITDA Interest Coverage (x) 18.5 9.5 5.7 4.6 2.0

Funds from Operations/Total Debt (%) 83.4 45.7 32.3 22.7 10.5

Free Operating Cash Flow/Total Debt (%) 57.8 23.2 16.0 7.1 1.3

Disc. Cash Flow/Debt (%) 30.5 12.5 8.0 3.4 0.8

Total Debt/EBITDA (x) 0.9 1.6 2.6 3.2 5.8

Total Debt/Total Debt + Equity (%) 25.7 33.8 44.4 51.9 75.8

No. of Companies 8 55 104 58 55

8

Problems With Traditional Financial Ratio Analysis

1 Univariate Technique1-at-a-time

2 No “Bottom Line”

3 Subjective Weightings

4 Ambiguous

5 Misleading

9

Forecasting Distress With Discriminant AnalysisLinear Form

Z = a1x1 + a2x2 + a3x3 + …… + anxn

Z = Discriminant Score (Z Score)

a1 an = Discriminant Coefficients (Weights)

x1 xn = Discriminant Variables (e.g. Ratios)

Examplex

xx

xx

xx

xxx

x

x

x x x

xx

x

xx

x

x x

xx

x

x

x

xx

xx

x x

x

x

xxx

EBITTA

EQUITY/DEBT

10

Z-Score Component Definitions and Weightings

Variable Definition Weighting FactorX1 Working Capital 1.2

Total Assets

X2 Retained Earnings 1.4

Total Assets

X3 EBIT 3.3

Total Assets

X4 Market Value of Equity 0.6

Book Value of Total Liabilities

X5 Sales 1.0

Total Assets

11

Z Score Bankruptcy ModelZ = .012X1 + .014X2 + .033X3 + .006X4 + .999X5

e.g. 20.0%

Z = 1.2X1 + 1.4X2 + 3.3X3 + .6X4 + .999X5

e.g. 0.20

X1 = Current Assets - Current Liabilities X4 = Market Value of EquityTotal Assets Total Liabilities

X2 = Retained Earnings X5 = Sales (= # of Times

Total Assets Total Assets e.g. 2.0x)

X3 = Earnings Before Interest and Taxes

Total Assets

12

Zones of Discrimination:Original Z - Score Model (1968)

Z > 2.99 - “Safe” Zone

1.8 < Z < 2.99 - “Grey” Zone

Z < 1.80 - “Distress” Zone

Time Series Impact On Corporate Z-Scores

13

• Credit Risk Migration- Greater Use of Leverage- Impact of HY Bond & LL Markets- Global Competition- More and Larger Bankruptcies

• Increased Type II Error

14

Estimating Probability of Default (PD) and Probability of Loss Given Defaults (LGD)Method #1• Credit scores on new or existing debt• Bond rating equivalents on new issues (Mortality) or

existing issues (Rating Agency Cumulative Defaults)• Utilizing mortality or cumulative default rates to estimate

marginal and cumulative defaults• Estimating Default Recoveries and Probability of Loss

Method #2• Credit scores on new or existing debt• Direct estimation of the probability of default• Based on PDs, assign a rating

or

15

Median Z-Score by S&P Bond Rating for U.S. Manufacturing Firms: 1992 - 2013

Sources: Compustat Database, mainly S&P 500 firms, compilation by NYU Salomon Center, Stern School of Business.

Rating 2013 (No.) 2004-2010 1996-2001 1992-1995

AAA/AA 4.13 (15) 4.18 6.20* 4.80*

A 4.00 (64) 3.71 4.22 3.87

BBB 3.01 (131) 3.26 3.74 2.75

BB 2.69 (119) 2.48 2.81 2.25

B 1.66 (80) 1.74 1.80 1.87

CCC/CC 0.23 (3) 0.46 0.33 0.40

D 0.01 (33) -0.04 -0.20 0.05

*AAA Only.

16

Marginal and Cumulative Mortality Rate Actuarial Approach

One can measure the cumulative mortality rate (CMR) over a specific time period (1,2,…, T years) by subtracting the product of the surviving

populations of each of the previous years from one (1.0), that is,

MMR(r,t)

=

total value of defaulting debt from rating (r) in year (t)total value of the population at the start of the year (t)

MMR = Marginal Mortality Rate

CMR(r,t) = 1 - Π SR(r,t) ,t = 1 N

r = AAA CCChere CMR (r,t) = Cumulative Mortality Rate of (r) in (t),

SR (r,t) = Survival Rate in (r,t) , 1 - MMR (r,t)

17

Mortality Rate Concept(Illustrative Calculation)For BB Rated Issues

Security Issued Year 1 Year 2No. Amount Default Call SF Default Call SF

1 50 -- -- 5 -- -- 52 50 50 -- -- NE NE NE3 100 -- 100 -- NE NE NE4 100 -- -- -- 100 -- --5 150 -- -- -- -- -- 156 150 -- -- -- -- -- --7 200 -- -- 20 -- -- 208 200 -- -- -- -- 200 --9 250 -- -- -- -- -- --

10 250 -- -- -- -- -- --

Total 1,500 50 100 25 100 200 40

AmountStart of 1,500 175 1,325 340 985Period

- - - =

Year 1 Year 2MarginalMortality 50/1,500 = 3.3% 100/1,325 = 7.5%

Rate1 - (SR1 x SR2 ) = CMR2

Cumulative Rate 3.3% 1 - (96.7% x 92.5%) = 10.55%

NE = No longer in existenceSF = Sinking fund

18

All Rated Corporate Bonds*1971-2015

Mortality Rates by Original Rating

*Rated by S&P at IssuanceBased on 2,903 issues

Source: Standard & Poor's (New York) and Author's Compilation

Years After Issuance

19

All Rated Corporate Bonds*1971-2015

Mortality Losses by Original Rating

*Rated by S&P at IssuanceBased on 2,481 issues

Source: Standard & Poor's (New York) and Author's Compilation

Years After Issuance

20

Classification & Prediction AccuracyZ Score (1968) Failure Model*

1969-1975 1976-1995 1997-1999Year Prior Original Holdout Predictive Predictive PredictiveTo Failure Sample (33) Sample (25) Sample (86) Sample (110) Sample (120)

1 94% (88%) 96% (72%) 82% (75%) 85% (78%) 94% (84%)

2 72% 80% 68% 75% 74%

3 48% - - - -

4 29% - - - -

5 36% - - - -

*Using 2.67 as cutoff score (1.81 cutoff accuracy in parenthesis)

21

Z Score Trend - LTV Corp.

-1.5-1

-0.50

0.51

1.52

2.53

3.5

1980 1981 1982 1983 1984 1985 1986

Year

Z Sc

ore

Grey Zone

Bankrupt

July ‘86

Safe Zone

Distress Zone

2.99

1.8

BB+BBB-

B- B-CCC+

CCC+

D

22

International Harvester (Navistar)Z Score (1974 – 2001)

-0.50

0.51

1.52

2.53

3.5

'74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00

Year

Z Sc

ore

Safe Zone

Grey Zone

Distress Zone

23

Chrysler CorporationZ Score (1976 – 3Q 1998*)

00.5

11.5

22.5

33.5

4

'76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98

Year

Z S

core

Consolidated Co.

Operating Co.

Gov’t Loan Guarantee

Safe Zone

Grey Zone

*Third quarter figures for 1998 are annualized

Eastman Kodak: Z-Score AnalysisDecember 2003 – December 2011 (Biennial)

24

0.00

0.50

1.00

1.50

2.00

2.50

12/31/2003 12/31/2005 12/31/2007 12/31/2009 12/31/2011

Z-Sc

ore

Z-Score

BBB

CCC

Ch. 11 Filing 1/19/12

25

IBM CorporationZ Score (1980 – 2001)

00.5

11.5

22.5

33.5

44.5

55.5

6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Year

Z S

core

Operating Co.Safe Zone

Consolidated Co.

Grey Zone BBB

BB

B 1/93: Downgrade AAA to AA-

July 1993: Downgrade AA- to A

26

U.S. Automotive Industry: Z, Z"-Scores and Bond Rating Equivalents (BRE) - Ford & GM: Z and Z”-Score Tracking

Note: Consolidated Annual Results. Data Source: Bloomberg., Edgar

Ford GMZ-Scores BRE Z-Scores BRE

09/30/13 1.51 B 1.44 B

12/31/12 1.44 B 1.57 B

12/31/11 1.66 B 1.59 B

12/31/10 1.62 B 1.56 B

12/31/09 1.24 B- 0.28 CCC

03/31/09 n/a n/a (1.12) D

12/31/08 0.85 CCC (0.63) D

12/31/07 1.15 B- 0.77 CCC+

12/31/06 0.95 CCC+ 1.12 B-

12/31/05 1.25 B- 0.96 CCC+

Z”-Scores BRE Z”-Scores BRE

09/30/13 5.61 BB- 4.56 B+

12/31/12 5.59 BB- 4.54 B+

12/31/11 6.29 BB+ 5.04 B+

12/31/10 5.86 BB- 4.60 B+

12/31/09 5.84 BB- 2.72 CCC+

12/31/08 4.71 B+ (3.62) D

12/31/07 5.82 BB- 1.85 CCC-

12/31/06 5.42 BB- 3.39 B-

12/31/05 5.74 BB- 6.59 BBB+

27

Z-Score Model Applied to Ford (Consolidated Data): Bond Rating Equivalents and Scores from 2005 – 2013 (9/30)

Z- Score: Ford Motor Co.

B-

CCC+

B-

CCC

B-

B B

BB

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

12/31/2005 12/31/2007 12/31/2009 12/31/2011 9/30/2013

Z-Sc

ore

Z-Score

28

Z-Score Model Applied to GM (Consolidated Data):Bond Rating Equivalents and Scores from 2005 – 2015

Z- Score: General Motors Co.

CCC+B-

CCC+

D

CCC

B B

D

B B BB

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00D

ec-

05

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

De

c-1

5

Z-Sc

ore

Z-Score

Ch. 11 Filing 6/01/09

Emergence, New Co. Only, from Bankruptcy, 7/13/09

Full Emergence from Bankruptcy

3/31/11Upgrade to BBB-

by S&P9/25/14

29

Z’ ScorePrivate Firm Model

Z’ = .717X1 + .847X2 + 3.107X3 + .420X4 + .998X5

X1 = Current Assets - Current Liabilities

Total Assets

X2 = Retained Earnings

Total Assets


Total Assets

X4 = Book Value of Equity Z’ > 2.90 - “Safe” Zone

Total Liabilities 1.23 < Z’ < 2.90 - “Grey” Zone

X5 = Sales Z’ < 1.23 - “Distress” Zone

Total Assets

30

Z” Score Model for Manufacturers, Non-Manufacturer Industrials; Developed and Emerging Market Credits

Z” = 3.25 + 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4

X1 = Current Assets - Current Liabilities

Total Assets

X2 = Retained Earnings

Total Assets


Total Assets

X4 = Book Value of Equity Z” > 5.85 - “Safe” Zone

Total Liabilities 4.35 < Z” < 5.85 - “Grey” Zone

Z” < 4.35 - “Distress” Zone

31

Classification & Prediction Accuracy (Type I) Z”-Score Bankruptcy Model* (Based on the Original Sample and a Sample of Recent Bankruptcies (2011-2014))

No. of Months Prior to

Bankruptcy FilingOriginal Sample

(33)Holdout Sample

(25)2011-2014

Predictive Sample (71)

6 94% 96% 93%

18 72% 80% 87%

30 - - 67%

*E. Altman and J. Hartzell, “Emerging Market Corporate Bonds – A Scoring System”, Salomon Brothers Corporate Bond Research, May 15, 1995, Summarized in E. Altman and E. Hotchkiss, Corporate Financial Distress and Bankruptcy, 3rd Edition, John Wiley & Sons, 2006.

Z”-Score Analysis of A Sample of Recently Bankrupt Publicly Held, Non-financial Companies

(2011-2014)

Z”-Scores and Cutoffs Z” (t)* Z” (t-1)* Z” (t-2)*Average (10.95) 1.15 2.65

Median (1.75) 2.75 3.55

Z”< 4.35 (Distress Zone) 66/71 62/71 46/69

Type I Accuracy 93.0% 87.0% 66.7%

Z”> 5.85 (Safe Zone) 1/71 5/71 9/69

Type II Accuracy 98.6% 93.0% 87.0%

* On average, 5.6 months prior to bankruptcy at (t), 17.6 months at (t-1) and 29.6 months at (t-2).

Source: Altman NYU Salomon Center Bankruptcy Database, Capital I.Q, Altman & Hotchkiss (2006).

32

33

US Bond Rating Equivalents Based on Z”-Score ModelZ”=3.25+6.56X1+3.26X2+6.72X3+1.05X4

aSample Size in Parantheses. bInterpolated between CCC and CC/D. cBased on 94 Chapter 11 bankruptcy filings, 2010-2013.Sources: Compustat, Company Filings and S&P.

Rating Median 1996 Z”-Scorea Median 2006 Z”-Scorea Median 2013 Z”-Scorea

AAA/AA+ 8.15 (8) 7.51 (14) 8.80 (15)

AA/AA- 7.16 (33) 7.78 (20) 8.40 (17)

A+ 6.85 (24) 7.76 (26) 8.22 (23)

A 6.65 (42) 7.53 (61) 6.94 (48)

A- 6.40 (38) 7.10 (65) 6.12 (52)

BBB+ 6.25 (38) 6.47 (74) 5.80 (70)

BBB 5.85 (59) 6.41 (99) 5.75 (127)

BBB- 5.65 (52) 6.36 (76) 5.70 (96)

BB+ 5.25 (34) 6.25 (68) 5.65 (71)

BB 4.95 (25) 6.17 (114) 5.52 (100)

BB- 4.75 (65) 5.65 (173) 5.07 (121)

B+ 4.50 (78) 5.05 (164) 4.81 (93)

B 4.15 (115) 4.29 (139) 4.03 (100)

B- 3.75 (95) 3.68 (62) 3.74 (37)

CCC+ 3.20 (23) 2.98 (16) 2.84 (13)

CCC 2.50 (10) 2.20 (8) 2.57(3)

CCC- 1.75 (6) 1.62 (-)b 1.72 (-)b

CC/D 0 (14) 0.84 (120) 0.05 (94)c

34

Classification & Prediction Accuracy (Type I)Z”-Score Bankruptcy Model*

No. of Months Prior to

Bankruptcy FilingOriginal Sample

(33)Holdout Sample

(25)2011-2014

Predictive Sample (69)

6 94% 96% 93%

18 72% 80% 87%

*E. Altman and J. Hartzell, “Emerging Market Corporate Bonds – A Scoring System”, Salomon Brothers Corporate Bond Research, May 15, 1995, Summarized in E. Altman and E. Hotchkiss, Corporate Financial Distress and Bankruptcy, 3rd Edition, John Wiley & Sons, 2006.

American Airlines: Z Score & Z” Score AnalysisDecember 2003 – June 2011

35

Date Z-Score Z''-Score12/31/03 0.35 2.3003/31/04 0.46 2.5506/30/04 0.52 2.6309/30/04 0.49 2.5312/31/04 0.44 2.3203/31/05 0.42 2.2506/30/05 0.46 2.3209/30/05 0.51 2.4112/31/05 0.51 2.2703/31/06 0.58 2.3606/30/06 0.66 2.6209/30/06 0.71 2.7012/31/06 0.80 2.7103/31/07 0.86 2.8906/30/07 0.86 3.0209/30/07 0.86 2.9712/31/07 0.94 3.1603/31/08 0.77 2.8606/30/08 0.67 2.7109/30/08 0.63 2.2912/31/08 0.37 1.1603/31/09 0.27 1.0206/30/09 0.24 1.0909/30/09 0.28 1.6412/31/09 0.23 1.5503/31/10 0.19 1.4006/30/10 0.22 1.3609/30/10 0.32 1.4712/31/10 0.40 1.5303/31/11 0.43 1.9106/30/11 0.36 1.49

0.000.501.001.502.002.503.003.504.004.50

12

/1/2

00

3

5/1

/20

04

10

/1/2

00

4

3/1

/20

05

8/1

/20

05

1/1

/20

06

6/1

/20

06

11

/1/2

00

6

4/1

/20

07

9/1

/20

07

2/1

/20

08

7/1

/20

08

12

/1/2

00

8

5/1

/20

09

10

/1/2

00

9

3/1

/20

10

8/1

/20

10

1/1

/20

11

6/1

/20

11

Z-Score Z''-Score

36

EDF EquivalentRating

CCCCC

B

BB

BBB

A

AA

AAA

Enron Credit Risk Measures

Source: A. Saunders and L. Allen, Credit Risk Measurement; J. Wiley, 2002

37

DAF Corporation Z Scores(Dutch Company Bankruptcy 1993)

1.75

2.15

1.53

1.000.80

0

0.5

1

1.5

2

2.5

Z Sc

ore

1987 1988 1989 1990 1991Year

AN EMERGING MARKET CORPORATE MODEL

39

An Emerging Market Credit Scoring System

• Step 1- Calculate the EM Score and its Bond Rating Equivalent (BRE) compared to the U.S. Bond Market

• Step 2 -Adjust (modify) the Bond Rating Equivalent for Forex Revaluation Vulnerability

• High vulnerability = -1 rating class (3 notches)

• Neutral vulnerability = -1 notch

• Low vulnerability = no change

• Step 3 -Adjust BRE for Risk of Industry in the Emerging Market vs. Risk of the Industry in the U.S.

• ± - 1 or 2 notches

40

An Emerging Market Credit Scoring System

• Step 4 -Adjustment of BRE for Competitive Position

• Dominant firm in industry = +1 notch

• Average firm in industry = no change

• Poor competitive position = -1 notch

• Step 5 -Special Collateral or Guarantees Impact on BRE

• Step 6 -Assess the yield in the U.S. market on the modified BRE of the emerging Market credit, then add the sovereign yield spread. Finally, compare the resulting required yield with the yield in the market.

MEXICAN FIRMS Z-SCORE ANALYSIS

41

42

Mexican Corporate Issuers – EM Scores and Modified Ratings (December 1994)

EM Bond-Rating Modified RatingsCompany Industry Score Equivalent Rating M/S&P/D&PAeromexico Airlines -4.42 D D NR/NR/NRApasco Cement 8.48 AAA A Ba2/NR/NRCCM Supermarkets 4.78 BB- B+ NR/NR/NRCemex Cement 5.67 BBB- BBB- Ba3/BB/BBCydsa Chemicals 4.67 BB- B+ NR/NR/NRDESC Conglomerate 4.23 B BB+ NR/NR/NREmpresas ICA Construction 5.96 BBB BB B1/BB-/B+Femsa Bottling 6.37 A- BBB+ NR/NR/NRGemex Bottling 5.4 BB+ BB+ Ba3/NR/NRGIDUSA (Durango) Paper and Forest Products 4.61 B+ BB B1/BB-/NRGMD Construction 4.85 BB B- B3/NR/NRGruma Food Processing 5.56 BBB- BBB+ NR/NR/NRGrupo Dina Auto Manufacturing 5.54 BBB- BB+ NR/NR/BHylsamex Steel 5.51 BBB- BB- NR/NR/NRIMSA Steel 5.45 BBB- BB- NR/NR/NRKimberly-Clark de Mexico Paper and Forest Products 8.96 AAA AA NR/NR/NRLiverpool Retail 9.85 AAA A+ NR/NR/NRModerna Conglomerate 5.28 BB+ BB+ NR/NR/NRPonderosa Paper and Forest Products 6.64 A BB NR/NR/NRSan Luis Autoparts 2.69 CCC CCC- NR/NR/NRSidek Conglomerate 4.68 BB- B NR/NR/CCCSimec Steel 4.42 B+ B- NR/NR/CCCSitur Hotel and Tourism 5.17 BB+ B NR/NR/CCCSynkro Textile/Apparel 1.59 CCC- CCC NR/NR/NRTAMSA Steel Pipes 3.34 CCC+ B NR/NR/NRTELMEX Telecommunications 9.57 AAA AA- NR/NR/NRTelevisa Cable and Media 7.29 AA BBB+ Ba2/NR/NRTMM Shipping 5.34 BB+ BB+ Ba2/BB-/NRVitro Glass 5.18 BB+ BB Ba2/NR/NR

43

Z”-Score and Equivalent Bond Rating

Liability of BVEquity of BV*05.1

Assets TotalEBIT*72.6

Assets TotalEarnings Retained*26.3

Assets TotalCapital Working*56.625.3Score Z" ++++=−

Z''-Score Rating Z''-Score Rating

8.15 > 8.15 AAA 5.65 5.85 BBB-7.60 8.15 AA+ 5.25 5.65 BB+7.30 7.60 AA 4.95 5.25 BB Grey zone7.00 7.30 AA- 4.75 4.95 BB-

Safe zone 6.85 7.00 A+ 4.50 4.75 B+6.65 6.85 A 4.15 4.50 B6.40 6.65 A- 3.75 4.15 B-6.25 6.40 BBB+ 3.20 3.75 CCC+ Distress zone5.85 6.25 BBB 2.50 3.20 CCC

1.75 2.50 CCC- < 1.75 1.75 D

RECENT LATIN AMERICAN DISTRESSED FIRM Z”-SCORES

TRENDS

44

Mexico: Z”-Scores for Vitro S.A.B. de C.V.

7.58 7.13

-0.19-0.83

-1.30

-2.00-1.000.001.002.003.004.005.006.007.008.009.00

2006 2007 2008 2009 2010

Z”-S

core

2006 2007 2008 2009 2010

Z”-Score 7.58 7.13 -0.19 -0.83 -1.30

Implied Rating (BRE) Aa2 Aa3 D D D

Actual Rating (Moody’s) B2 B2 Caa1 N/R N/R 45

Default: Feb. 2009

Mexico: Z”-Scores for Corporación Geo S.A.B. de C.V.

6.99 6.99 6.83

4.68 5.054.53

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2008 2009 2010 2011 2012 2013

Z”-S

core

2008 2009 2010 2011 2012 2013

Z”-Score 6.99 6.99 6.83 4.68 5.05 4.53

Implied Rating (BRE) A1 A1 A2 B1 Ba2 B1

Actual Rating (Moody’s) N/R Ba3 Ba3 Ba3 Ba3 Ca46

Default: Jul. 2013Bankruptcy: Mar. 2014

Mexico: Z”-Scores for Desarrolladora Homex S.A.B. de C.V.

7.30 7.757.21

6.01

-1.37

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

2009 2010 2011 2012 2013

Z”-S

core

2009 2010 2011 2012 2013

Z”-Score 7.30 7.75 7.21 6.01 -1.37

Implied Rating (BRE) Aa3 Aa1 Aa3 Baa2 D

Actual Rating (Moody’s) Ba3 Ba3 Ba3 Ba3 C47

Default: Jul. 2013

Mexico: Z”-Scores for CEMEX S.A.B. de C.V.

6.47

5.003.90

4.97 4.60 4.48 4.24 4.34

0.001.002.003.004.005.006.007.008.009.00

10.00

2006 2007 2008 2009 2010 2011 2012 2013

Z”-S

core

2006 2007 2008 2009 2010 2011 2012 2013

Z”-Score 6.47 5.00 3.90 4.97 4.60 4.48 4.24 4.34

Implied Rating (BRE) A3 Ba2 B3 Ba2 B1 B1 B2 B1

48

MEXICO: GRUPO ICA

49

ICA´s Situation as of September 2015• The stock price was down 60% vs 6 months before

• 8x Net Debt/EBITDA (half of its debt, USD denominated)

• The construction segment contributed with 3/4 of the revenue, and generated a negative EBIT margin

• Cost of debt = 10.1%

• Ongoing legal disputes vs the government

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

0

20

40

60

80

100

120

140

160

180

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Pric

e m

ovem

ent

ICA

Price ICA

Price Mexbol

Altman's Z-score

Altman's DoublePrime Z-score

Z-sc

ores

Trend of ICA’s Stock Price & Z-Scores(Bond Default – December 29, 2015)

Brasil: Z”-Scores for Lupatech S.A.

5.03

0.63

-0.95

-6.68

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

2010 2011 2012 2013

Z”-S

core

2010 2011 2012 2013

Z”-Score 5.03 0.63 -0.95 -6.68

Implied Rating (BRE) Ba2 D D D

Actual Rating (Moody’s) Caa1 Caa2 Caa2 D52

Default: Apr. 2013

Brasil: Z”-Scores for Rede Energia S.A. (Grupo Rede)

4.143.65 3.58 3.46

2.46

0.000.501.001.502.002.503.003.504.004.505.00

2007 2008 2009 2010 2011

Z”-S

core

2007 2008 2009 2010 2011

Z”-Score 4.14 3.65 3.58 3.46 2.46

Implied Rating (BRE) B3 Caa1 Caa1 Caa1 Caa3

Actual Rating (Moody’s) B2 B2 Caa1 Caa1 Caa1 53

Bankruptcy: Nov. 2012

Chile: Z”-Scores for La Polar S.A.

8.42 8.04 7.87 7.08

-18.19

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

2007 2008 2009 2010 2011

Z”-S

core

2007 2008 2009 2010 2011

Z”-Score 8.42 8.04 7.87 7.08 -18.19

Implied Rating (BRE) Aaa Aa1 Aa1 Aa3 D

54

Restructuring: Nov. 2011

Peru: Z”-Scores for Austral Group S.A.

10.13

3.13

0.16

2.88

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1997 1998 1999 2000

Z”-S

core

1997 1998 1999 2000

Z”-Score 10.13 3.13 0.16 2.88

Implied Rating (BRE) Aaa Caa2 D Caa2

55

Bankruptcy: Mar. 2000

Dominican Republic: Z”-Scores for Cap Cana S.A.

1.78

0.01

1.83

1.22

2.05

0.00

0.50

1.00

1.50

2.00

2.50

2005 2006 2007 2008 2009

Z”-S

core

2005 2006 2007 2008 2009

Z”-Score 1.78 0.01 1.83 1.22 2.05

Implied Rating (BRE) Caa3 D Caa3 Caa3 Caa3

Actual Rating (Moody’s) B3 B3 Ca N/R 56

Distressed Exchange: May 2009

57

Argenti (A Score System): DefectsIn Management

Weight8 - Chief Executive is an autocrat4 - He is also the chairman2 - Passive Board - an autocrat assures this2 - Unbalanced Board - too many engineers or too many finance types1 - Poor management depth

In Accountancy3 - No budgets or budgetary controls3 - No cash flow plans, or not updated3 - No costing system. Cost and contribution of each product

unknown15 - Poor response to change, old fashioned product, obsolete factory,

out-of-date marketing Total Defects 42 Pass 10

58

Argenti (A Score System): SymptomsWeight

5 - Financial signs, such as Z Score4 - Creative accounting. Chief executive is the first to see signs of

failure, and in an attempt to hide it from creditors and the banks, accounts are ‘glossed over’ by overvaluing stocks, using lower depreciation, etc.

3 - Non-financial signs, such as untidy offices, frozen salaries, chief executive ‘ill’, high staff turnover, low morale, rumors

1 - “Terminal signs”Total Symptoms 13Total Possible Score 100 Pass 25

Total Score Prognosis0-10 No Worry (High Pass)0-25 Pass10-18 Cause for Anxiety (Pass)18-35 Grey Zone - Warning Sign>35 Company “At Risk”

DISTRESS PREDICTION MODEL

FOR CHINESE COMPANIES

59

China Corporate Sector Credit Analysis: Five-Year (2008-2012) Medians of Selected Financial Measures (Bond Rating Equivalents (BREs) Based on U.S. Industrial Ratios)

No. of entities

Debt/EBITDA (x)

Debt/debt + equity (%)

EBITDA margin (%)

FFO/debt (%)

Return on capital (%)

Median ratio BRE

Median Ratio BRE

Median Ratio BRE

Median Ratio BRE

Median Ratio BRE

SummaryRisk Ratings*

Automobile OEM & parts suppliers 9 0.7 AA+ 20.0 AA+ 6.8 CCC- 89.6 AA 18.8 A- A-

Building materials 8 4.2 BB- 50.8 BB 21.1 A 18.9 BB- 11.9 BB+ BB+

Capital goods 14 2.8 BB+ 40.0 BBB+ 8.7 CCC- 32.1 BBB- 13.1 BBB BB+

Coal 6 2.8 BB+ 44.6 BBB 15.6 B- 26.3 BB 13.9 BBB BB+

Construction and engineering 7 4.8 B+ 55.0 BB 5.6 CCC- 14.4 B+ 10.6 BB B+

Consumer products 15 0.7 AA+ 16.7 AAA 12.0 CCC 110.1 AA 21.1 A A

Diversified 12 6.2 B- 52.8 BB 8.4 CCC- 11.9 B 7.6 B B

Healthcare & pharmaceuticals 5 1.7 A- 19.2 AA+ 5.6 CCC- 53.3 A 13.3 BBB BBB

High technology 9 1.5 A 24.5 AA+ 4.9 CCC- 54.1 A 14.5 BBB+ BBB+

Infrastructure 16 4.1 BB- 40.5 BBB+ 42.3 AAA 16.7 B+ 7.8 B BBB-

Metals & mining 7 7.2 CCC+ 55.5 BB 6.6 CCC- 10.6 B 4.9 CCC+ B-

Oil & gas 5 1.6 A 26.4 AA 23.8 A+ 55.2 A+ 13.7 BBB A

Real estate 7 3.8 BB- 49.0 BB+ 27.1 AA 10.5 B 14.1 BBB BBB-

Retail 12 3.8 BB- 54.5 BB 8.2 CCC- 21.7 BB- 12.8 BBB- BB-

Telecommunications 3 1.7 A- 23.6 AA+ 35.3 AAA 88.5 AA 6.2 B- A

Transportation services 6 3.1 BB 33.3 A 17.6 BB 28.3 BB+ 7.3 B BB+

Utilities 10 7.9 CCC+ 76.7 B 20.2 A- 6.9 CCC+ 5.0 CCC+ B

Total or average 151 3.4 BB 40.2 BBB+ 15.9 B- 38.2 BBB+ 11.6 BB+ BB+

*Summary Risk Rating based on Equally Weighted Average of the five financial measures.Source: Standard & Poor’s, Ratings Direct, August 18, 2013 and S&P Key Financial Ratios (2009-2011). BREs based on E. Altman and NYU Salomon Center interpolations.

60

No. of entities

Debt/EBITDA (x)

Debt/debt + equity (%)

EBITDA margin (%)

FFO/debt (%)

Return on capital (%)

Median ratio BRE

Median Ratio BRE

Median Ratio BRE

Median Ratio BRE

Median Ratio BRE

SummaryRisk Ratings*

Automobile OEM & parts suppliers 9 0.7 AA+ 20.0 AA+ 6.8 CCC- 89.6 AA 18.8 AA- A

Building materials 8 4.2 BB- 50.8 BB 21.1 AA- 18.9 BB- 11.9 BBB+ BBB-

Capital goods 14 2.8 BBB- 40.0 BBB+ 8.7 CCC- 32.1 BBB 13.1 BBB+ BB+

Coal 6 2.8 BBB- 44.6 BBB 15.6 B- 26.3 BB+ 13.9 A- BB+

Construction and engineering 7 4.8 B+ 55.0 BB 5.6 CCC- 14.4 B+ 10.6 BBB- B+

Consumer products 15 0.7 AA+ 16.7 AAA 12.0 CCC 110.1 AA 21.1 AA A+

Diversified 12 6.2 B 52.8 BB 8.4 CCC- 11.9 B 7.6 B+ B

Healthcare & pharmaceuticals 5 1.7 A 19.2 AA+ 5.6 CCC- 53.3 A+ 13.3 A- BBB+

High technology 9 1.5 A 24.5 AA 4.9 CCC- 54.1 A+ 14.5 A- BBB+

Infrastructure 16 4.1 BB- 40.5 BBB+ 42.3 AAA 16.7 BB- 7.8 B+ BBB-

Metals & mining 7 7.2 B- 55.5 BB 6.6 CCC- 10.6 B 4.9 B- B-

Oil & gas 5 1.6 A 26.4 AA 23.8 AA 55.2 A+ 13.7 A- A+

Real estate 7 3.8 BB- 49.0 BB+ 27.1 AA+ 10.5 B 14.1 A- BBB-

Retail 12 3.8 BB- 54.5 BB 8.2 CCC- 21.7 BB 12.8 BBB+ BB-

Telecommunications 3 1.7 A 23.6 AA 35.3 AAA 88.5 AA 6.2 B A

Transportation services 6 3.1 BB+ 33.3 A 17.6 A 28.3 BBB- 7.3 B+ BBB

Utilities 10 7.9 CCC+ 76.7 B 20.2 A+ 6.9 B- 5.0 B- B+

Total or average 151 3.4 BB 40.2 BBB+ 15.9 BBB+ 38.2 BBB+ 11.6 BBB BBB

China Corporate Sector Credit Analysis: Five-Year (2008-2012) Medians of Selected Financial Measures (Bond Rating Equivalents (BREs) Based on EMEA Industrial Ratios)

*Summary Risk Rating based on Equally Weighted Average of the five financial measures.Source: Standard & Poor’s, Ratings Direct, August 18, 2013 and S&P Key Financial Ratios (2009-2011). BREs based on E. Altman and NYU Salomon Center interpolations.

61

China Corporate Industry Sectors: Hierarchy of Summary Risk Ratings (2008-2012)(Based on U.S. & EMEA Industrial BREs)

Summary Risk Ratings: U.S. Equivalents

Summary Risk Ratings: EMEA Equivalents

Consumer products A A+

Oil & gas A A+

Telecommunications A A

Automobile OEM & parts suppliers A- A

High technology BBB+ BBB+

Healthcare & pharmaceuticals BBB BBB+

Infrastructure BBB- BBB-

Real estate BBB- BBB-

Building materials BB+ BBB-

Capital goods BB+ BB+

Coal BB+ BB+

Transportation services BB+ BBB

Retail BB- BB-

Construction and engineering B+ B+

Diversified B B

Utilities B B+

Metals & mining B- B-

Overall average BB+ BBB

Source: Standard & Poor’s, Ratings Direct, August 18, 2013 and S&P Key Financial Ratios (2009-2011). BRE based on E. Altman and NYU Salomon Center interpolations.

62

63

ZChina Model for Chinese Companies

• Training: 30 “ST” (Special Treatment Distressed Companies) based on Sample two consecutive years of negative earnings or NAV below

par value listed on Sheuzhen or Shanghai Stock Exchanges (1998,1999).

30 “Non – ST” listed companies (Healthy)60

• Holdout (Test) : 21 “ST” Companies (1998,1999)Sample 39 “Non – ST” Companies (Randomly Selected)

60

• Variable Selection: 15 Financial Ratios from one year before “ST,”including Profitability, Solvency, Liquidity and Asset Management Measures. Based on their acceptance in China as well as from several prior distress prediction models outside of China.

Model Development and Test Results

Based on a study, “Corporate Financial Distress Diagnosis in China,” L. Zhang, J. Yen and E. Altman, Summer 2007.

64

Model for Distress Prediction in China

Zc = 0.517 - 0.388 (X1) + 1.158 (X2) + 9.320 (X3) – 0.460 (X4)

Where:

X1 = Working Capital / Average Total Assets (ATA) =

X2 = Retained Earnings / TA =

X3 = Net Profit / ATA =

X4 = Total Liabilities / TA =

Mean “ST” Mean “Non-ST”

• -0.17 0.12

(F = 5.8)

• -0.33 0.22

(F = 19.8)

• -0.36 0.26

(F = 139.1)

• 0.75 0.42

(F = 42.4)

Average Zc= -3.50 2.96

65

Classification AccuracyTraining Sample

Actual Classification Predicted Classification

Distressed Non-Distressed

Distressed (“ST”) 30 30 0

(100%)

Non-Distressed 0 0 30

(100%)

66

Accuracy Over Time

Accuracy

Years Prior to “ST” Level

1 100%

2 87%

3 70%

4 60%

5 22%

67

Holdout Sample Accuracy

Predictive Accuracy

# of Firms (0.5) Cutoff (0.3) Cutoff

Distressed 21 21 19

(100%) (90%)

Non-Distressed 39 34 39

(87%) (100%)

68

Rating Distribution of Listed Chinese Companies

AAA ≥ 1. 8 6.3% 4.3 2.3 0.9 1.0 1.2 2.8 2.5

AA 1.3 – 1.8 17.5 11.0 9.2 5.9 4.2 5.8 5.4 5.7

A 0.9 – 1.3 31.6 31.3 27.6 18.5 15.3 14.8 15.1 12.4

BBB 0.5 – 0.9 24.7 29.3 37.8 40.2 39.6 36.3 34.4 31.8

BB 0.0 – 0.5 10.7 16.1 15.2 22.4 25.6 28.8 28.2 28.8

B -1.0 – 0.0 4.9 5.0 4.6 7.3 8.1 1.5 6.8 9.4

C-2.0 –- 1.00

2.7 1.6 1.6 2.6 2.8 1.0 2.6 3.7

D Zc < -2.0 1.6 1.6 1.7 2.2 3.5 10.6 4.6 5.8

Rating Zc–Score Percentage Each Year

Level Interval 1998 1999 2000 2001 2002 2003 2004 2005

69

Credit Ratings of “ST” Companies Announced in 2002

RatingLevel

2002 (#) 2002 (%) 2001 (%) 2000 (%) 1999 (%) 1998 (%)

AAA 0 0 0 3.6 3.5 7.1

AA 0 0 0 3.6 7.1 7.1

A 0 0 0 10.7 3.6 10.7

BBB 1 3.6 0 14.3 21.4 28.6

BB 6 21.4 14.3 14.3 39.3 21.4

B 8 28.6 25.0 46.4 17.9 10.7

C 5 17.9 28.6 3.6 7.1 10.7

D 8 28.6 32.1 3.6 0.0 3.6

Total 28 Companies

CAN WE PREDICT CHAPTER-22?

70

Z”-Scores for Chapter 11’s

71

This table lists a sample of firms that did not file for bankruptcy protection a second time, and their Z”-Scores

COMPANY NAME EFECTIVE DATEZ"-SCORE AFTER

EMERGENCE BREZ"-SCORE

1-YEAR POST BRE1 AMERCO 3/15/2004 4.78 BB- 4.39 B+2 AMERICAN COMMERCIAL LINES, LLC 1/10/2005 5.02 BB 6.89 A+3 ASARCO, INC. 12/9/2009 7.45 AA+ 7.62 AA+4 ATLAS AIR WORLDWIDE HOLDINGS, INC. 7/27/2004 5.58 BBB- 6.61 A5 AURORA OIL & GAS CORP. 12/22/2009 5.72 BBB- 18.70 AAA6 AVADO BRANDS, INC. 5/19/2005 8.58 AAA 22.26 AAA7 BAYOU STEEL CORP. 2/18/2004 n/a n/a -13.06 D8 BOONTON ELECTRONICS 11/18/1994 7.67 AAA/AA+ 7.63 AA9 CAI WIRELESS SYSTEMS INC 10/14/1998 3.04 CCC+ n/a n/a

10 CALPINE CORP. 1/31/2008 3.20 CCC+ 3.03 CCC+11 CARBIDE/GRAPHITE GROUP, INC. 1/10/2005 4.98 BB 4.27 B12 CHARTER COMMUNICATIONS, INC. 11/30/2009 n/a n/a 3.45 CCC+13 CHEROKEE CORP 6/1/1993 4.00 B 2.09 CCC-14 CONSOLIDATED HYDROINC 11/7/1997 3.90 B- 4.81 BB-15 CORNERSTONE PROPANE PARTNERS LP 12/20/2004 n/a n/a 4.57 B+16 DELTA AIR LINES, INC. 4/30/2007 3.74 B- 2.05 CCC-17 EL PASO ELECTRONIC 2/12/1996 4.36 B+ 4.75 BB-18 ELSINORE CORPORATION 2/28/1997 3.65 B- 4.18 B19 EMCOR 10/3/1994 4.03 B 4.38 B+20 EMERSON RADIO 8/9/1994 5.42 BB+ 4.08 B21 ENERGY PARTNERS LTD. 9/21/2009 4.82 BB- 6.55 A22 ENTERGY NEW ORLEANS, INC. 5/8/2007 5.35 BB+ 5.88 BBB23 FANSTEEL INC 12/22/2003 3.21 CCC+ 2.83 CCC24 FEDERAL MOGUL CORP. 12/27/2007 5.21 BB+ 4.55 B+25 FLAGSTAR COMPANIES INC 1/7/1998 2.90 CCC+ -0.44 D26 FOOTSTAR, INC. 2/7/2006 6.35 A- 4.41 B+27 GANTOS 3/7/1995 6.58 A 6.17 BBB+28 GENTEKINC 10/7/2003 4.51 B+ 2.19 CCC29 GLOBAL POWER EQUIPMENT GROUP 1/21/2008 6.92 A+ 6.77 A+30 GLOBALSTAR, LP 6/29/2004 7.48 AA+ 9.40 AAA31 GRANT GEOPHYSICAL 9/30/1997 4.49 B+ 4.14 B32 HANCOCK FABRICS, INC. 8/1/2008 6.88 A+ 5.88 BBB33 HARNISCHFEGE INDUSTRIES INC 7/13/2001 5.70 BBB- 5.30 BB+34 HAYES LEMMERZ INTERNATIONAL, INC. 12/16/2009 -3.18 D n/a n/a35 HEARTLAND WIRELESS INC 4/5/1999 6.11 BBB+ 5.01 BB

Z”-Scores for Chapter 11’s (continued)

72




1-YEAR POST BRE36 HEXCEL CORPORATION 1/12/1995 4.83 BB- 4.45 B+37 HVIDEMARINEINC 12/15/1999 3.69 B- 3.64 B-38 IMPERIALSUGARCOTX 8/29/2001 3.98 B 5.00 BB39 INTEGRATED ELECTRICAL SERVICES, INC. 5/15/2006 6.57 A- 7.01 AA-40 INTERNATIONAL WIRE GROUP, INC. 10/20/2004 n/a n/a 6.32 BBB+41 IPCS, INC. 7/20/2004 4.35 B 4.30 B42 KAISER ALUMINUM CORP. 7/6/2006 6.62 A- 10.36 AAA43 KAISER GROUP INTERNATIONAL INC 12/18/2000 6.94 A+ 4.23 B44 KASH N’KARRY 12/12/1994 4.20 B 4.60 B+45 KEYSTONE CONSOLIDATED INDUSTRIES, INC. 9/1/2005 4.31 B 6.25 BBB46 KITTY HAWK INC 9/30/2002 6.19 BBB+ 7.39 AA47 KRYSTAL COMPANY 4/22/1997 3.46 CCC+ 9.41 AAA48 LAIDLAW INC 2/28/2003 4.40 B+ 5.55 BBB-49 LEAP WIRELESS INTERNATIONAL, INC. 8/16/2004 6.07 BBB 5.67 BBB-50 LEAR CORP. 11/9/2009 5.23 BB 6.18 BBB51 LOEHMANN’S HOLDINGS INC DE 10/31/2000 5.48 BBB- 6.24 BBB+52 LOEWEN GROUP INT’L INC 1/2/2002 3.09 CCC+ 3.62 B-53 LONE STAR INDUSTRIES 3/1/1994 5.16 BB+ 6.19 BBB+54 LORAL SPACE & COMMUNICATIONS LTD. 11/22/2005 4.75 B+ 4.86 BB-55 MAGELLAN HEALTH SERVICES, INC. 1/5/2004 6.09 BBB 7.89 AA+56 MAGNACHIP SEMICONDUCTOR, LLC 11/9/2009 6.25 BBB+ 7.84 AA+57 MTS, INC. 3/19/2004 6.76 A 6.14 BBB58 NOTHWESTERN CORP. 11/2/2004 4.10 B- 3.86 B-59 NRG ENERGY 11/24/2003 3.75 B- 1.22 CCC-60 NTK HOLDINGS, INC. (NORTEK, INC.) 12/17/2009 n/a n/a 4.66 B+61 OGLEBAY NORTON CO. 1/31/2005 4.22 B 5.30 BB+62 ONEIDA LTD. 8/30/2006 -0.95 D n/a n/a63 OWENS CORNING 10/31/2006 4.41 B 5.09 BB64 PACIFIC GAS & ELECTRIC CO. 4/12/2004 4.15 B 3.88 B-65 PARAGON TRADE BRANDS INC 1/28/2000 5.72 BBB- n/a n/a66 PATHMARK STORES INC 9/18/2000 4.12 B 2.47 CCC67 PEREGRINE SYSTEMS INC 7/18/2003 4.28 B 3.47 CCC+68 PETROLEUM GEO SERVICES ASA 10/21/2003 4.32 B 5.48 BBB-69 PHONE TEL 11/18/1999 3.54 B- 4.30 B


73


Source: Authors’ compilation from CapitalIQ data and Bloomberg.



1-YEAR POST BRE70 PILGRIM'S PRIDE CORP. 12/28/2009 4.79 BB- 5.92 BBB71 POLYMRE GROUP INC 1/3/2003 2.35 CCC 2.09 CCC-72 PRIMUS TELECOMMUNICATION GROUP, INC. 7/1/2009 3.75 B- 3.57 B-73 RCN CORP. 12/22/2004 n/a n/a 3.64 B-74 REDBACK NETWORKS, INC. 1/2/2004 6.49 A- 6.27 BBB+75 REGUS PLC 1/12/2004 2.42 CCC 3.22 CCC+76 SAFETY COMPONENTS INT’L 10/11/2000 6.13 BBB+ 5.13 BB+77 SEITEL, INC. 7/2/2004 3.68 B- 5.38 BB+78 SOLUTIA, INC. 2/28/2008 3.93 B- 3.86 B-79 SOUTHERN MINERAL CORP 8/1/2000 5.38 BB+ n/a n/a80 SPECTRUM BRANDS, INC. 8/28/2009 4.68 BB- 4.65 BB-81 STAGE STORES INC NV 8/24/2001 9.98 AAA 11.78 AAA82 STERLING CHEMICALS INC 12/19/2002 4.98 BB 3.58 B-83 STRATOSPHERE CORPORATION 10/4/1998 8.16 AAA 8.56 AAA84 TELEMUNDO 7/20/1994 5.00 BB 4.98 BB85 TELETRAC INC 9/15/1999 3.82 B- 2.54 CCC86 VISTA EYECARE INC 5/31/2001 3.41 CCC+ 3.34 CCC+87 WARNACO GROUP INC 1/16/2003 4.27 B 4.62 B+

NUMBER OF BANKRUPTCIES 81 82AVERAGE Z"-SCORE 4.84 BB- 5.21 BB+MEDIAN Z"-SCORE 4.75 BB- 4.78 BB-STANDARD DEVIATION 1.83 3.74

74


Emerge Emerge + 1Number of Bankruptcies 81 82Average Z”–Score 4.84 BB- 5.21 BB+

Median Z”-Score 4.75 BB- 4.78 BB-

Standard Deviation 1.83 3.74

Source: Authors compilation from CapitalIQ data and Bloomberg.

Summary of Results


75

This table lists a sample of firms that filed for bankruptcy protection at least two times, and their Z”-Scores



1-YEAR POST BRERE-FILING

DATE1 AMERICAN BANKNOTE 11/21/2000 0.34 D 0.35 D 4/8/2005 4 4 182 AMES DEPT STORES 12/18/1992 4.74 BB- 6.31 BBB+ 8/20/2001 8 8 23 ANACOMP 6/4/1996 3.72 B- 2.93 CCC+ 10/19/2001 5 4 154 ANCHOR GLASS 11/25/1997 3.62 B- 3.73 B 4/15/2002 4 4 215 ANCHOR GLASS 8/9/2002 3.61 B- 4.05 B 8/8/2005 2 11 306 ATA HOLDINGS 1/31/2006 3.18 CCC+ 3.4 CCC+ 4/2/2008 2 2 27 BRENDLE’S 12/20/1993 6.65 A 6.6 A 4/16/1996 2 3 278 BRUNO'S, INC. 12/30/1999 1.33 D n/a n/a 2/5/2009 9 1 69 COHO ENERGY 3/21/2000 1.71 CCC- -3.27 D 2/24/2003 2 11 3

10 COMPOSITE TECHNOLOGY CORPORATION 10/31/2005 -1.01 D -0.86 D 4/10/2011 5 5 1011 CONSTAR INTERNATIONAL INC 5/14/2009 3.54 CCC+ 2.32 CCC- 1/11/2011 1 7 2812 DEX MEDIA 1/12/2010 2.55 CCC 2.56 CCC 3/17/2013 3 2 513 EAGLE FOOD CENTERS 7/10/2000 2.49 CCC 3.45 CCC+ 3/25/2004 3 8 1514 EDISON BROTHERS 9/26/1997 4.19 B 2.85 CCC 3/9/1999 1 5 1115 EXIDE TECHNOLOGIES 5/4/2004 0.75 D 2.24 CCC- 6/10/2013 9 1 616 FILENE'S BASEMENT, LLC (SYMS CORP.) 1/26/2010 8.56 AAA 6.32 BBB+ 11/2/2011 1 9 717 FOAMEX INTERNATIONAL INC. 2/1/2007 1.50 D -0.18 D 2/18/2009 2 0 1718 GALEY & LORD 2/10/2004 -0.66 D 0.28 D 3/5/2004 0 0 2419 GLOBAL AVIATION HOLDINGS INC. 3/26/2009 3.63 CCC+ 3.75 B- 2/5/2012 2 10 1020 GRAND UNION CO 5/31/1995 2.81 CCC 1.9 CCC- 6/24/1998 3 0 2421 GRAND UNION CO 8/5/1998 3.41 CCC+ 0.76 D 10/3/2000 2 1 2822 HARVARD INDUSTRIES 8/10/1992 2.38 CCC 1.1 CCC- 5/8/1997 4 8 2823 HARVARD INDUSTRIES 10/15/1998 1.21 CCC- 0.8 D 1/16/2002 3 3 124 HAYES LEMMERZ INTERNATIONAL, INC. 5/12/2003 4.44 B 4.47 B 5/11/2009 5 11 2925 HEARTLAND WIRELESS 3/15/1999 3.87 B- 5.25 BB+ 9/5/2003 4 5 2126 HOMELAND HOLDING 7/16/1996 4.73 BB- 4.18 B 8/1/2001 5 0 1627 HOSTESS BRANDS, INC 12/5/2008 -1.47 D n/a n/a 1/11/2012 3 1 628 INSIGHT HEALTH SERVICES HOLDINGS CORP. 7/10/2007 -0.02 D 0.56 D 12/10/2010 3 5 029 ITHACA INDUSTRIES 12/16/1996 7.21 AA/AA- 6.86 A+ 5/9/2000 3 4 2330 LAMONTS APPARELS 12/18/1997 2.83 CCC 2.16 CCC 1/4/2000 2 0 1731 LOEHMANN'S, INC. 9/6/2000 1.26 D n/a n/a 11/15/2010 10 2 932 MCLEOD USA 4/18/2002 -2.77 D 3.42 CCC+ 12/16/2005 3 7 28

PERIOD BETWEEN EMERGENCE & SECOND FILING YEARS MONTHS DAYS


76

This table lists a sample of firms that filed for bankruptcy protection at least two times, and their Z”-Scores

Source: Authors’ compilation from CapitalIQ data and Bloomberg.



1-YEAR POST BRERE-FILING

DATE33 MEMOREX TELEX 2/7/1992 -0.49 D 1.37 CCC- 2/11/1994 2 0 434 MEMOREX TELEX 3/14/1994 0.62 D -1.3 D 10/15/1996 2 7 135 ORMET CORPORATION 12/15/2004 0.63 D 2/25/2013 8 2 1036 PAYLESS CASHWAYS 12/2/1997 5.19 BB+ 5.64 BBB- 6/4/2001 3 6 237 PENN TRAFFIC CO 5/27/1999 4.39 B+ 3.73 B- 3/17/2005 5 9 1838 PILLOWTEX 5/2/2002 2.78 CCC n/a n/a 7/30/2003 1 2 2839 PLANET HOLLYWOOD 1/21/2000 -8.24 D -6.77 D 10/19/2001 1 8 2840 PLIANT CORPORATION 6/23/2006 1.78 CCC- 1.28 D 2/11/2009 2 7 1941 RYMER FOODS 4/7/1993 4.44 B+ 4.14 B 7/8/1997 4 3 142 SALANT 7/30/1993 6.52 A- 5.8 BBB 12/29/1998 5 4 2943 SATELITES MEXICANOS, S.A. DE C.V. 11/13/2006 3.58 CCC+ 4.21 B 4/6/2011 4 4 2444 SILICON GRAPHICS, INC. 9/19/2006 -16.54 D n/a n/a 4/1/2009 2 6 1345 SMITH CORONA 2/28/1997 5.36 BB+ 3.92 B- 5/23/2000 3 2 2546 SOLO SERVE 7/6/1995 2.98 CCC+ 1.5 CCC- 1/20/1999 3 6 1447 SPIEGEL, INC. 5/25/2005 5.10 BB 3.88 B- 6/17/2009 4 0 2348 STEAKHOUSE PTNRS 12/19/2003 1.41 CCC- 1.19 CCC- 5/15/2008 4 4 2649 SUPERMEDIA, INC. 12/22/2009 3.26 CCC+ 3.38 CCC+ 3/18/2013 3 2 2450 TBS INTERNATIONAL PLC 10/12/2000 4.57 B+ 7.10 AA- 2/6/2012 11 3 2551 TODAYS MAN 12/12/1997 7.24 AA- 9.12 AAA 5/6/2004 6 4 2452 TOKHEIM 10/9/2000 3.9 B- -0.57 D 11/21/2002 2 1 1253 TRANS WORLD AIR 8/11/1993 -1.33 D 1.98 CCC- 6/30/1995 1 10 1954 TRANS WORLD AIR 8/4/1995 3.05 CCC+ 2.09 CCC- 1/10/2001 5 5 655 TRICO MARINE SERVICES, INC. 1/19/2005 6.98 A+ 10.69 AAA 8/25/2010 5 7 656 TRISM 12/9/1999 -2.06 D -1.02 D 12/18/2001 2 0 957 UNITED MERCHANTS 8/16/1991 -1.51 D 0.63 D 2/22/1996 4 6 658 US AIRWAYS GROUP 3/18/2003 2.63 CCC 1.84 CCC- 9/16/2005 2 5 2959 USG 4/23/1993 3.48 CCC+ 3.82 B- 6/25/2001 8 2 260 WESTMORELAND COAL 12/22/1994 2.18 CCC -4.36 D 12/23/1996 2 0 161 WHEREHOUSE 12/16/1996 7.59 AA/AA- 7.95 AA+ 1/20/2003 6 1 4

NUMBER OF BANKRUPTCIES 60 56 YEARS MONTHS DAYSAVERAGE Z"-SCORE 2.39 CCC 2.68 CCC AVERAGE 4 1 29MEDIAN Z"-SCORE 3.02 CCC+ 2.70 CCCSTANDARD DEVIATION 3.81 3.13

PERIOD BETWEEN EMERGENCE & SECOND FILING YEARS MONTHS DAYS

77


Emerge Emerge + 1Number of Bankruptcies

60 56 Years Months DaysAverage Z”-Score 2.39 CCC 2.68 CCC Average 4 1 29

Median Z”-Score 3.02 CCC+ 2.70 CCC

Standard Deviation 3.81 3.13

Source: Authors compilation from CapitalIQ data and Bloomberg.

Summary of Results

78

Chapter 22’s, 33’s, 44’s & 55’s in the U.S.

*Must have been a public company at the time of one of the filings. Sources: The Bankruptcy Almanac, annually, Boston: New Generation Research and Altman and Hotchkiss Corporate Financial Distress and Bankruptcy, J. Wiley, Hoboken, NJ., (2006).

1984-2015

Year Chapter 22’s Chapter 33’s Chapter 44’s Chapter 55’s

Total Bankruptcy

Filings* % Multiple Filers1984 – 1989 18 0 0 0 788 2.28%

1990 10 0 0 0 115 8.70%1991 9 0 0 0 123 7.32%1992 6 0 0 0 91 6.59%1993 8 0 0 0 86 9.30%1994 5 0 0 0 70 7.14%1995 9 0 0 0 85 10.59%1996 12 2 0 0 86 16.28%1997 5 0 0 0 83 6.02%1998 2 1 0 0 122 2.46%1999 10 0 0 0 145 6.90%2000 12 1 0 0 187 6.95%2001 17 2 0 0 265 7.17%2002 11 0 1 0 229 5.24%2003 17 1 0 0 176 10.23%2004 6 0 0 0 93 6.45%2005 9 1 0 0 86 11.63%2006 4 0 0 0 66 6.06%2007 8 1 0 0 78 11.54%2008 19 0 0 0 138 13.77%2009 18 1 1 0 211 9.48%2010 10 1 0 0 106 10.38%2011 5 2 0 0 86 8.14%2012 12 1 0 0 87 14.94%2013 11 2 1 0 71 19.72%2014 7 0 0 1 54 14.81%2015 8 0 0 0 79 10.13%

Totals 268 16 3 1 3806 9.27% Average, Annual 7.57% Average, Overall

KMV MODEL

80

KMV Credit Monitor Model

• Provides a quantitative assessment of the credit risk of publicly traded companies

• The model is theoretically rather than empirically based

• It is built around the market’s valuation of a firm’s creditworthiness

• The model can be applied to the universe of publicly-traded companies

• The universe consists of thousands of companies in the U.S.

• By contrast, only approximately 2000 companies have publicly-traded debt that is rated by the rating agencies. Even then, bond price data is often difficult to get.

81

The Market’s Valuation of Debt

• The stock market’s perception of the value of a firm’s equity are readily conveyed in a traded company’s stock price

• The information contained in the firm’s stock price and balance sheet can be translated into an implied risk of default through two relationships:

• The relationship between the market value of a firm’s equity and the market value of its assets.

• The relationship between the volatility of a firm’s assets and the volatility of a firm’s equity.

82

KMV Credit Monitor Output

• A quantitative estimate of the default probability called the expected default frequency (EDF).

• EDFs are calibrated to measure the probability of a borrower defaulting within one year.

• EDFs are reported in percentages ranging from 0 to 20.

83

KMV Model - Empirical Result

STEP 1 - Model Estimates Market Value and Volatility of Firm’s Assets

STEP 2 - Then calculates the Distance-to-Default (# of Standard Deviations)

Distance-to-Default is a Type of Asset/Liability Coverage Ratio

STEP 3 - Distance-to-Default of a Firm is Mapped Against a Database of Empirical Frequencies of Similar Distance-to-Default Companies to Obtain Expected Default Frequency (EDF) for a Firm

84

Estimation of Market Value And Volatility of Firm’s Assets

• Asset Values are Based on Underlying Value of Firm, Independent of Firm’s Liabilities.

• Asset Volatility Calculated as the Annualized Standard Deviation of Percentage Changes in the Market Value of Assets.

• Equity Market Value and its Volatility, as Well as the Liability Structure, are Used as Proxies for the Asset’s Value and Volatility.

• Option Theory of Assets Used to Value Assets Since MV of Debt is Not Known. If Debt MV is Known, then A=E+D (MV). But, MV Assets are Calculated by Knowing Only the MV Equity and PV of Liabilities.

85

Estimation of Market Value And Volatility of Firm’s Assets (continued)

• KMV Assumes that All Short Term Debt and 50% of Long Term Liabilities Are Used to Calculate the Default Point (Was 25% of LTD).

• When MV Assets < Payable Liabilities then Firm Defaults. Firm Cannot Sell Off Assets or Raise Additional Capital Because All Existing Assets are Fully Encumbered.

86

KMV Strengths

• Can be applied to any publicly-traded company

• Responsive to changing conditions, (EDF updated quarterly)

• Based on stock market data which is timely and contains a forward looking view

• Strong theoretical underpinnings (versus ad-hoc models)

87

KMV Weaknesses

• Difficult to diagnose a theoretical EDF (what is the distribution of asset return outcomes)

• Problems in applying model to private companies and thinly-traded companies

• Results sensitive to stock market movements (does the stock-market over-react to news?)

• Ad-hoc definition of anticipated liabilities (i.e.. 50% of long-term debt)

88

89

KMV’S Expected Default Frequency (EDF)Based on empirical observation of the Historical Frequency of the Number of Firms that Defaulted With Asset Values (Equity + Debt) Exceeding Face Value of Debt Service By a Certain Number of Standard (Std.) Deviations at one year prior to default.For Example:

Current Market Value of Assets = $ 910Expected One Year Growth in Assets = 10%Expected One Year Asset Value = $1,000Standard Deviation = $ 150Par Value of Debt Service in One Year = $ 700

Therefore:# Std. Deviations from Debt Service = 2

Expected Default Frequency (EDF)Number of Firms that Defaulted With Asset Values 2 Std. Deviations from Debt Service

Total Population of Firms With 2 Std. Deviations from Debt Service

e.g.. = 50 Defaults = .05 = EDF1,000 Population

EDF =

90

Comparing Z-Score and KMV-EDF Bond Rating Equivalents: IBM Corporation

Documents

Corporate Credit Scoring Models for U.S. and Global Credit ...ealtman/CorpCrScoringModels.pdf · 1 Dr. Edward Altman NYU Stern School of Business. Corporate Credit Scoring Models