The graph is based on 6 months of historical data showing trend in industries over time versus the cross-industry median. This is significant for the credit risk manager looking to spot trends in the various sub industries as well as for that of the economy as a whole. The vertical axis shows the full spectrum of credit risk in both agency rating scale and the equivalent 1 year default probabilities. For reference, on the scale 0.10% is one tenth of one percent chance of default, or a 1 in 1,000 chance in the next 12 months.
Larger values on the risk scale (i.e. higher default probabilities) indicate elevated credit risk. The highest risk sub industry is the highest line on the graph. Alternatively, the least risky sub industry has the lowest group median and the lowest line on the graph.
What is an EDF?
EDF means Expected Default Frequency—the probability that a firm will default within a given time horizon, typically 1 year. A company with a current EDF credit measure of 2.00% has a 2% probability of defaulting within the next twelve months. If we create a portfolio of 1000 such companies, on average, 20 default over the next year, and 980 do not. A company with a 2% EDF credit measure is 10 times more likely to default than a firm with a 0.20% EDF credit measure. It is regarded as the most accurate and forward looking measure of credit risk in the world and is used by numerous energy firms and most major financial institutions.
More information on the EDF methodology can be found on the Moody’s KMV website, www.MoodysKMV.com
