In a slowing economy, corporate defaults are on the rise and are a growing concern to bond market investors, and the broader financial markets. Wouldn’t it be nice if there was a way to find out about defaults before they happen? FutureDefaults does just that. FutureDefaults forecasts corporate defaults before they happen in the future.

FutureDefaults takes a new approach in ascertaining a company’s chances of survival. Instead of analyzing financial statements, 10Ks and 10Qs, FutureDefaults looks only at the latest daily closing prices of a particular company’s bonds, and leaves the balance sheet information to the rating agencies. Because while balance sheet information may accurately represent a company’s sales and expenses, they are sales and expenses which have already occurred, and which are updated only quarterly at best. The nature of balance sheet information makes it impossible to track on a daily basis. Any unanticipated deterioration in a company’s sales will not show up on the balance sheet until at least the next quarter, when it’s too late.

FutureDefaults uses the latest market prices to determine what the market is saying about the likelihood of a company’s default.

Financial markets anticipate corporate slowdowns. Usually, this happens before a downgrade of the company’s bonds materialize. Unanticipated corporate slowdowns or other negative corporate information are frequently impounded in a company’s bond price long before it’s reflected in the company’s credit rating. Somehow "The market knows". FutureDefaults takes advantage of this fact and, using Savvysoft’s TOPS Credit derivatives software, factors out the default risk component that is inherent in any company’s bond price. FutureDefaults then expresses this default risk as the probability of default which is implied by the most recent price of a corporate bond. We refer to this probability as the implied default rate.

FutureDefaults implied default rates are forward looking and objective.

Rating agencies analyze balance sheets, which reflect what has already occurred. This information is then subject to human interpretation in the process of determining a company’s credit rating. Agency credit ratings therefore reflect what has already happened, and are backward looking and subject to an analyst’s individual biases. On the other hand, FutureDefaults implied default rates are based on the latest daily bond prices, which reflect the expectations and perceptions of default risk of the entire marketplace. Since FutureDefaults is based only on the latest bond prices, the FutureDefaults numbers reflect the expectations of the market in general and are forward looking. Since FutureDefaults implied default rates are calculated by Savvysoft’s TOPS Credit, FutureDefaults numbers are objective, unlike an analyst’s rating. In short, only FutureDefaults is based on the market’s best estimate of future defaults.

FutureDefaults implied default rates are dynamic.

Because FutureDefaults uses daily bond prices, and since those prices move every day, then FutureDefaults’ market implied default rates capture those price movements and are dynamic numbers, not static numbers. FutureDefaults provide daily updates of implied default rates, while rating agencies may let months or even years go by before adjusting their credit ratings.

The universe of FutureDefaults bonds spans the domestic and international corporate bond markets.

FutureDefaults covers corporate bonds in all industry sectors and across all credit ratings including investment grade and high yield. Coverage also includes corporations in the United States as well as those on other continents including Europe, Asia, Latin America and Australia. With FutureDefaults, the probability today of GMAC defaulting next year, and the probability of Sumitomo Bank defaulting in 10 years are just a mouse click away.

FutureDefaults uses only accurate, reliable bond prices.

We’ve all heard it: Garbage in, garbage out. It’s especially true when it comes to estimating default risk. That’s why Savvysoft has contracted with the market’s leading data vendors for the most up-to-date bond prices for FutureDefaults calculations. FutureDefaults provides implied default rates on thousands of issuers in the Americas, Europe, and Asia, spanning all credit qualities and industries.

The bond prices used in FutureDefaults calculations are the same ones used by the world’s biggest banks and brokerage houses for their other corporate bond calculations. These prices come from a combination of trade prices, broker quotes and market accepted models for pricing illiquid bonds. Savvysoft further cleans the data by ensuring that the bond prices used pass a number of integrity checks, further ensuring the accuracy of the implied default rates. Bad data isn’t fixed; it’s thrown away. Anything else would introduce human intervention and perhaps human error in the FutureDefaults calculation.

Once the bond pricing data is collected, it’s run through TOPS Credit, the market’s leading credit derivatives package. This ensures the default rates generated are totally accurate. TOPS Credit is the same credit derivatives package behind Savvysoft’s groundbreaking web site www.FreeCreditDerivatives.com, which is visited by thousands of credit industry professionals worldwide.

FutureDefaults Methodology

The methodology behind FutureDefaults is based on the insight that a corporate bond is a type of credit derivative. Credit derivatives are priced using the corporate issuer’s default rate as an input. Given a default rate, TOPS Credit prices a credit derivative. FutureDefaults turns this calculation around: given the price of a credit derivative (or corporate bond), TOPS Credit calculates the implied default rate needed to get to that price. This is the same method successfully employed for years by options traders, only now Savvysoft has applied it in the credit markets.

FutureDefaults is invaluable

FutureDefaults is an invaluable tool for anyone dealing with credit. This includes credit analysts, credit derivatives traders and marketers, Collateralized Loan Obligation (CLO) structurers, issuers, credit risk managers, regulators. The default information from FutureDefaults can be used as is, or plugged into other packages such as CreditMetrics, CreditManager, and others, to measure and manage credit risk. FutureDefaults could even be used by analysts at rating agencies!

FutureDefaults is a bargain

FutureDefaults is available by subscription, so there is no large upfront fee. Pay only for the implied default rates of the companies you follow. Take them all, or take just a few, for just a few dollars per month for each issuer. And the more issuers you subscribe to, the cheaper it gets.

To learn more about FutureDefaults, or to sign up, please call Savvysoft at +1 212 742 8677, or email info@futuredefaults.com.

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