CROSS-SECTORSECTOR IN-DEPTH 8 September 2016ContactsDanielle Ferry 212-553-7781Sr Director-Research danielle.ferry@moodys.comIrina Baron 1.212.553.4307Associate Director irina.baron@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.VIEWPOINTSEDF Trigger Levels and Time to Default Expected Default Frequency (EDFTM) credit measures are market-based one-year probability of default metrics for publicly listed companies. In prior research, we showed how EDF measures can be used for early warning of defaults and rating downgrades1. We described a series of early warning metrics based on the EDF measure that we call our Early Warning Toolkit. These include absolute EDF level compared against trigger levels, absolute EDF change, EDF level and change relative to those of country-industry peer groups, and EDF term structure inversion.In this research brief, we expand upon our analysis of EDF trigger levels. Moodys Analytics calculates dynamic EDF trigger levels for 52 different global industries on a daily basis2. The trigger levels have been calibrated to global historical defaults between 1999 and 2014so as to maximize the true positive rate and minimize the false negative rate. Well over 80 percent of defaulters had EDF levels at the time of default that exceeded their trigger levels. In this brief, we consider how much time passes between the time a defaulters EDF breaches the trigger and default occurs. This provides insight into how early of a signal EDF trigger levels can be and also how long before default occurs that one may expect to monitor a company after its EDF measure first hits the trigger.Defaulters Are Highly Likely to Have EDF Levels Above Their Industry-Specific Trigger Levels Overall, 87 percent of corporate defaulters and 81 percent of financial defaulters had EDF levels higher than their trigger levels at the time of ...
