Risk Management
FHRs™ are early indicators of companies' improving and deteriorating financial positions. As such, Rapid Ratings™ is an early flagging system of changes that risk managers can use for monitoring exposures. FHRs™ are more accurate measurements of corporate financial health and future competitive sustainability than traditional tools, including market based tools, and therefore translate into more accurate estimations of default probabilities and finer calibrations of investment risk.
Rapid Ratings™ also provides Estimated Probabilities of Default ("EPD"). In a unique, proprietary process, the EPD is derived from the FHR™ and is based on an extensive analysis of historical defaults. The resulting EPD is a powerful tool for analyzing the prospective default risk of a company. In addition to the stability of our EPD output, we have the advantage over competitor default models of being able to provide temporal, industry and macro factors as adjustments users can select and utilize for their own tailored scenario analysis.
Homebuilding Sector Case Study Estimation of Default Probabilities White Paper 
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Rapid Ratings™ also provides Estimated Probabilities of Default ("EPD"). In a unique, proprietary process, the EPD is derived from the FHR™ and is based on an extensive analysis of historical defaults. The resulting EPD is a powerful tool for analyzing the prospective default risk of a company. In addition to the stability of our EPD output, we have the advantage over competitor default models of being able to provide temporal, industry and macro factors as adjustments users can select and utilize for their own tailored scenario analysis.
- Unlike the Merton Structural Models (e.g. Moody's KMV), FHRs™ do not incorporate market pricing such as option or share price volatility, making our ratings more stable and completely uncorrelated with market pricing measures.
- Unlike the binary fail/non-fail prediction models (e.g. Multivariate Discriminant Analysis like Altman's Z-Score) FHRs™ do not produce false positives and negatives because default is not the dependent variable in the FHR models. Rather, they measure relative financial health (strength and weakness) whose variations across the spectrum are correlated with default through our EPD model.
- Since our FHRs™ and EPD are not derived with market pricing, we can rate and provide analysis on private companies as well as public companies.
The Relationship between WCI, FHR, 5 Year CDS Spread, S&P and Moody's Ratings Trends |
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| The graph delineates the difference between our ratings and the ratings of the major agencies for WCI Communities, a developer and homebuilder, which filed for bankruptcy in August of 2008. Note the early warning that the FHR provided versus the 5 year CDS spread. Moody's and S&P are the trademarks of their respective companies. |
Homebuilding Sector Case Study Estimation of Default Probabilities White Paper Contact Us