Research Article
Weight of the Default Component of CDS Spreads: Avoiding Procyclicality in Credit Loss Provisioning Framework
(a) WDC term structure calculation for BBB+ sample |
| | Selected debt metrics: BBB+ sample |
| | Maturity (years) | 1 | 3 | 5 | 7 | 10 | | Avg. (2007-2017) BBB+ sample’s CDS spread (bps) (A) | 35.1 | 57.3 | 81.0 | 96.0 | 107.5 | | SP-Moody’s average T-t-C sample’s cumulative ODR | 0.1% | 0.3% | 0.7% | 1.2% | 1.9% | | ODR implied average BBB+ sample’s spread (bps) (B) | 3.8 | 6.9 | 8.9 | 10.5 | 11.7 |
| | Weight of the Default Component (WDC = B/A) | 11.0% | 12.0% | 10.9% | 10.9% | 10.9% |
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(b) WDC term structure calculation for BBB sample |
| | Selected debt metrics: BBB sample |
| | Maturity (years) | 1 | 3 | 5 | 7 | 10 | | Avg. (2007-2017) BBB sample’s CDS spread (bps) (A) | 50.4 | 80.6 | 112.3 | 131.2 | 144.4 | | SP-Moody’s average T-t-C sample’s cumulative ODR | 0.2% | 0.7% | 1.5% | 2.3% | 3.5% | | ODR implied average BBB sample’s spread (bps) (B) | 10.4 | 14.5 | 18.1 | 19.7 | 21.3 |
| | Weight of the Default Component (WDC = B/A) | 20.7% | 18.0% | 16.1% | 15.0% | 14.7% |
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(c) WDC term structure calculation for BBB- sample |
| | Selected debt metrics: BBB- sample |
| | Maturity (years) | 1 | 3 | 5 | 7 | 10 | | Avg. (2007-2017) BBB- sample’s CDS spread (bps) (A) | 65.5 | 108.6 | 152.0 | 175.7 | 190.4 | | SP-Moody’s average T-t-C sample’s cumulative ODR | 0.3% | 1.3% | 2.6% | 3.9% | 5.6% | | ODR implied average BBB- sample’s spread (bps) (B) | 15.7 | 25.9 | 31.8 | 33.7 | 34.1 |
| | Weight of the Default Component (WDC = B/A) | 24.0% | 23.8% | 20.9% | 19.2% | 17.9% |
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(d) WDC term structure calculation for BB+ sample |
| | Selected debt metrics: BB+ sample |
| | Maturity (years) | 1 | 3 | 5 | 7 | 10 | | Avg. (2007-2017) BB+ sample’s CDS spread (bps) (A) | 123.6 | 179.0 | 230.0 | 255.3 | 266.9 | | SP-Moody’s average T-t-C sample’s cumulative ODR | 0.4% | 2.5% | 4.8% | 6.8% | 9.1% | | ODR implied average BB+ sample’s spread (bps) (B) | 24.9 | 50.0 | 58.1 | 59.6 | 56.0 |
| | Weight of the Default Component (WDC = B/A) | 20.2% | 27.9% | 25.3% | 23.3% | 21.0% |
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(e) WDC term structure calculation for BB sample |
| | Selected debt metrics: BB sample |
| | Maturity (years) | 1 | 3 | 5 | 7 | 10 | | Avg. (2007-2017) BB sample’s CDS spread (bps) (A) | 118.0 | 201.9 | 281.4 | 314.3 | 329.6 | | SP-Moody’s average T-t-C sample’s cumulative ODR | 0.7% | 3.5% | 6.6% | 8.9% | 12.2% | | ODR implied average BB sample’s spread (bps) (B) | 40.4 | 71.2 | 80.8 | 78.3 | 76.1 |
| | Weight of the Default Component (WDC = B/A) | 34.3% | 35.2% | 28.7% | 24.9% | 23.1% |
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(f) WDC term structure calculation for BB- sample |
| | Selected debt metrics: BB- sample |
| | Maturity (years) | 1 | 3 | 5 | 7 | 10 | | Avg. (2007-2017) BB- sample’s CDS spread (bps) (A) | 142.5 | 247.5 | 339.3 | 376.9 | 392.7 | | SP-Moody’s average T-t-C sample’s cumulative ODR | 1.3% | 6.4% | 11.8% | 16.2% | 21.3% | | ODR implied average BB- sample’s spread (bps) (B) | 75.9 | 131.1 | 146.3 | 145.7 | 136.6 |
| | Weight of the Default Component (WDC = B/A) | 53.3% | 53.0% | 43.1% | 38.7% | 34.8% |
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