Bankruptcy Predictor Model Message Board

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Strategies & Market Trends : Bankruptcy Predictor Model

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To: Razorbak who wrote (158)	3/26/1999 2:12:00 PM
From: Bob Rudd	Read Replies (1) of 477

Additional market- based perspective on default risk could come from work of KMV: forbes.com partial quote <<KMV is remarkably open about what it is up to. The essence of its black box is this: To know the bond, follow the stock. Get a sense of how volatile a company's business value is by looking at volatility in the stock price. Then calculate the probability that the business value will sink below the sum total of its debts. That probability gives you a pretty good assessment of default risk. Example: A casino company, let us say, has a stock market value of $500 million and debt outstanding of $1 billion. The market is telling us, that is, that the enterprise value of this going business and real estate is $1.5 billion. In the past several years the market capitalization has swung between $250 million and $1 billion. This corresponds to a swing in enterprise value between $1.25 billion and $2 billion. [This appears to consider the Debt at nominal value, but how then could enterprise value fall below value of Debt?? ...Using the market value of debt, adjusted for rate changes might be better approach] Using conventional random-walk models of price movements, this range of enterprise market values can be translated into a probability that, within a 12-month period, the enterprise value will swing below $1 billion. Such a downdraft in the casino business would probably entail a default on its debts.>> More info KMV - mostly general: sfweekly.com Maybe we could play with these ideas and come up with confirming approach.

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