The credit quality of Australian companies continues to improve according to ANZ Investment Bank's Crystal Credit Quality Index, a quantitative index being introduced to Asian investors this week.
The index was launched in November last year and, according to its creators, shows Aussie credits moving further away from the likelihood of default. This is in contrast to the trend observed by the credit rating agencies which have reported a continued deterioration of Australian credits in recent years.
ANZ's head of credit research, Kate Birchall, is touring Asia this week to explain the index to regional fixed-income investors. "Crystal provides an alternative benchmark that links the equity markets and the debt markets to show positive or negative movements in credit quality," says Birchall, explaining that the index includes all 100-plus domestic and offshore listed companies that have Australian dollar debt or Australian governed debt outstanding.
ANZ applies a formula using the market capitalization of a company and its total outstanding liabilities to produce a 'distance to default' or DD score. The higher the score, the better the credit quality.
Birchall says the index has been backdated to November 2001. "The average DD score of the constituent companies now sits at just under seven compared to a score of about five back in 2001, so that shows an improvement of about two points of deviation."
The biggest variable in ANZ's index is volatility, says Birchall. "If the equity markets are going through a period of volatility there is a tendency for the credit quality in these models to be weaker. This is because more volatility can result in an increased possibility of default."
In Asia, Birchall is meeting with investment managers and potential issuers of Australian dollar debt to discuss the finer points of the quantitative measure. "Australia is an attractive market for investors and issuers because of its low volatility and high credit quality," she says. "This index provides them with an alternative way of analysing the markets. An alternative to the traditional credit ratings executed by the agencies."
The Crystal index is updated on the first trading day of each month and is distributed through Bloomberg, Dow Jones and Reuters. It incorporates a headline number and 12 sub-indices emphasizing credit ratings (AAA, AA, A and BBB) and industries (including resources, food and beverage, automotive and media).