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Thomson Reuters Integrates Kamakura’s Default Probabilities into CDS Pricing and Analytics Suite

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Thomson Reuters today announced that it has integrated Kamakura’s default probability service into its flagship financial desktop, Reuters 3000Xtra.

Kamakura’s default probabilities are now available via Reuters 3000 Xtra covering a universe of more than 1,500 public firms and close to 100 sovereign entities. Along with Thomson Reuters credit default swap (CDS) spread data, the two firms have created a Market Premium Ratio, which helps identify the portion of a traded CDS spread that indicates actual default risk and the portion of the spread that reflects other factors, such as liquidity. Thomson Reuters has also built related tools to facilitate relative value analysis on CDS spreads for purposes of arbitrage, hedging and risk valuation.

Kamakura, a provider of risk management information, processing and software, led the way in developing the world’s first fully integrated enterprise risk management system that analyses credit risk, market risk, asset and liability management, transfer pricing, and capital allocation. The company estimates default probabilities using what is termed as a ‘reduced-form’ approach. This varies from the commonly used ‘structural’ methodology in that a much broader array of explanatory variables are used as inputs to forecast the probability of default, thus reducing dependence on the more volatile equity markets.

Andrew Hausman, global head of fixed income at Thomson Reuters, said: “The recent market turmoil clearly demonstrated limitations with some widely-used approaches to firm valuation. Integrating Kamakura’s default probabilities into Reuters 3000Xtra means users can now base their decisions on powerful new intelligent information that will give them a real edge”.

Kamakura president and chief operating officer, Warren Sherman, added: ”The current credit crisis has shown very clearly that equity holders and debt holders can have different risk profiles as credit risk increases. A firm where the senior debt holders are rescued in a bailout can still leave subordinated debt holders, preferred stock holders and common stock holders with very large losses. Adding Kamakura default probabilities to Reuters 3000Xtra helps the full spectrum of liability holders distinguish between the risk of failure of a firm and the risk of loss for a given class of liabilities. This is critical to all investors in corporate common stock, preferred stock and traditional fixed income liabilities.”

This new joint Thomson Reuters-Kamakura tool offers the following features: the CDS spreads, default probabilities and Market Premium Ratios for public and sovereign entities with a default probability equal to or greater than 1%; the mean and median of Market Premium Ratios by sector and rating; and the ability to chart historical default probabilities, Market Premium Ratios and CDS spreads.

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