Moody’s KMV releases RiskCalc for Korean private firms

Moody’s KMV has released RiskCalc Korea, a web-based model for estimating the probability of default or expected default frequencies (EDF) on obligations of non-financial Korean private companies.

The system allows users to benchmark, underwrite or price private company debt, and to assist in securitising portfolios of private firm debt. RiskCalc EDFs help determine if a prospective borrower meets credit-underwriting standards and if the current spread on loans is sufficient to add shareholder value. It also helps to determine whether loans should be kept on- or off-balance sheet and whether capital attribution levels are appropriate.

Jeff Bohn, managing director of Moody’s KMV, said the release of the product was particularly timely given expected changes in banking regulation in the form of Basel II. “One of the key aspects of Basel II is the measurement of credit risk, with banks being encouraged to differentiate borrowers and categorise their book exposures based on risk.” This approach involves the estimation of the probability of default, loss-given default and expected exposure at default.

RiskCalc Korea uses data from a historical database of more than 32,000 Korean private firms, of which nearly 3,300 have defaulted. It also uses 13 financial statement values to reflect a firm’s profitability, gearing, debt coverage, liquidity, activity levels and sales growth, with adjustments for industry sector and firm size. Moody’s KMV chose the ratios for each category on the basis of their stand-alone ability to predict default and for their behaviour within a multivariate model. They were then transformed to produce one- and five-year EDFs that are also mapped to Moody’s Investors Service’s historical bond default rates.

Moody’s KMV will work in partnership with Korea Information Service (KIS), one of the country’s largest data vendors and risk rating systems provider, to market RiskCalc Korea and other Moody’s KMV products in the country.