CROSS-SECTORSECTOR IN-DEPTH 28 April 2016TABLE OF CONTENTSIntroduction 2Data Sample 2EDF level: Setting the Optimal EDF Trigger Level 2 Going Beyond EDF Level: Additional Signals of Impending Credit Distress7Putting It All to Work in Practice 10ContactsDanielle Ferry 212-553-7781Sr Director-Research danielle.ferry@moodys.comIrina Baron 1.212.553.4307Associate Director irina.baron@moodys.comDavid Hamilton 65.6511.4650MD-APAC Sales david.hamilton@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.VIEWPOINTSUsing EDF Measures to Identify At-Risk Names A Monitoring&Early Warning Toolkit Summary Moodys Analytics Public Firm EDFTM (Expected Default Frequency) credit measures are forward-looking probabilities of default, available on a daily basis, for over 42,000 corporate and financial firms, globally, with publicly traded equity. Like fundamental credit analysis, the EDF model quantifies business and financial risk, but unlike fundamental credit analysis, it employs both balance sheet information and financial market data to determine default risk. The market value-based approach of the EDF model benefits from the forward-looking nature of financial markets and markets real-time updating of companies expected future cash flows. As a result, EDF measures provide timely warning of changes in credit risk. Regular model validation demonstrates the power of EDF measures to rank order firms by default risk, to signal credit distress well before default, and, in the aggregate, to be consistent with the level of observed default rates. In this report, we outline a practical approach for using EDF measures to effectively monitor large portfolios of firms and proactively identify at-risk names. The Early Warning Toolkit, as we call it, recommends tracking five EDF-related metrics associated with elevated default risk:¯ EDF level whet...
