Solution Brief
Risk data and analytics
Manage risks and identify opportunities.
The issue
KRIS® solutions from SAS tackle the core business challenge of accurately forecasting corporate default probabilities to help you make better-informed lending, investment and business management decisions. By integrating a wide array of market, macroeconomic and financial data, KRIS solutions deliver granular, transparent default probability forecasts across a full-term structure. This transparency is crucial for understanding how and why credit risk shifts over time, pinpointing the specific factors that drive changes in default probabilities.
Beyond direct application to credit risk management, KRIS solutions also support investment management in both risk- and alpha-generating dimensions with successful applications across many strategies, such as equity long/short, convertible arbitrage and systematic credit portfolios. In an era of heightened market fragility and market reactions happening at the speed of light, it’s clear that relying solely on rating agency assessments can leave investors and lenders exposed. KRIS solutions fill this gap with rich and timely insights that help manage credit and mark-to-market losses, allowing institutions such as banks, pension funds, insurance companies, investment managers and hedge funds to adjust exposures and seize market opportunities with greater precision.
The challenge
Credit market demand
All lending and investment institutions have the same problem: risk of default by borrowers and debt issuers – that includes banks, hedge funds, pension funds, insurance companies, wealth managers and city and state treasurers.
Overcome inertia
Financial institutions are slow to change. Many continue to rely on internal credit scoring and agency credit ratings. There are more modern solutions available from SAS that are both well-vetted in academia and proven in practice by some of the largest and most sophisticated investors and industry regulators.
Obtain greater precision
Ratings offer ordinal measures of risk that are infrequently updated and comprise only twenty letter grades. SAS default probabilities models update daily as new data is available and measure risk in hundreds of a percent which provides more information, precision and analytical value.
Offer transparency
SAS offers transparency about its models, offering full disclosures required by regulators, executives and board members. SAS default probabilities are generated using modern statistical techniques – offered in long-standing SAS products.
Optimize data sources
The SAS reduced-form default probabilities model is unconstrained in factor selection. It currently includes over forty inputs, comprising market data, macroeconomic data and quarterly financial data.
Early warning signals
An important objective of credit modeling is the ability to see in advance trends that will affect the value of investments. KRIS solutions offer several unique capabilities that have consistently helped subscribers anticipate and act on adverse developments in time for them to avoid material losses.
Troubled Company Index
The Troubled Company Index measures the percentage of 41,500 public firms in 76 countries that have an annualized one-month default risk of over 1%.
Our approach
Regulatory reporting should be regarded as the minimal level of risk management, while practitioners recognize that much more needs to be done. The best course for decision makers is to diversify model risk. SAS makes model diversification an attractive alternative.
We approach the problem by providing risk model data to help you:
Provide timely default probabilities
Allow KRIS subscribers to quantify and actively monitor the credit outlook for over 40,000 public companies, sovereigns and US banks. KRIS offers time series of risk data and the ability to overlay, for comparison, sector performance (in percentiles) and individual companies.
Furnish early warnings
An important risk objective is the ability to see, in advance, changes in default probabilities that suggest adverse changes in the value of investments and even the possibility of principal loss in the event of outright default. KRIS offers unique capabilities that have consistently helped subscribers anticipate adverse developments, in time for them to avoid such losses.
Detect market opportunities
A risk heat map is a unique capability that cross-references: 1) bond spreads by rating; 2) bond spreads by default probabilities; and 3) ratings by default probabilities. It’s updated daily. It identifies and quantifies discrepancies in value and in risk between our default probabilities and two other independent sources: the bond market and S&P ratings. A low spread/high default probability and high spread/low default probability can both be signals to inform buy/sell decisions.
Breakout of risk factor by impact – Spirit Airlines
Risk drivers view of Spirit Airlines.
SAS difference
SAS provides unparalleled default probability data and analytics by leveraging:
Multifactor models
- SAS default probability models are based on selecting variables with the highest statistical significance. Input data is drawn from market and econometric data providers, as well as regulatory company filings.
- Our data set contains more than 4,000 defaults, representing millions of observations over the past 30 years. These periods covered major market turmoil in which billions of dollars were lost and long-established financial institutions failed.
Term structures
- Default probabilities exhibit term structures, like mortgage loan rates and CDS prices. Investors require a premium for the time they’re exposed to credit risk. Understanding the time premium of default risk is critical for both valuation and risk assessment.
- SAS models use a nested regression technique to generate term structures for each credit-risky name. This technique is the most robust among solution providers and is unique to SAS.
Company fails
- SAS collects and individually evaluates economic failures rather than relying solely on agency ratings or bankruptcy filings. Debt restructurings, for instance, may adversely reduce or lengthen investors' payment obligations, so these companies are included in our default data.
Transparency/data downloads
- KRIS solutions offer an intuitive user interface that provides extensive inquiry and comparative analysis. Subscribers can download default probabilities and their primary risk drivers to combine with proprietary data and further enhance in-house models. This feature is desirable for hedge funds and asset managers.