Tim Backshall, director in credit markets strategy, says the tool, dubbed Barra Credit, is unique because it gleans information from across the capital structure to identify red flags or opportunities in the bond market. For instance, it looks at asset values and default-swap levels, among other data. He says this is important for traditional investors in the bond market, 80% of whom still cannot use credit derivatives but at least should be able to benefit from the early warning signs they might offer. The tool, for example, recognized that Toys R Us' corporate default risk had risen beyond those of companies in its peer group and would have allowed investors to reduce their exposure to the name before Moody's Investors Service's recent downgrade. Barra's tool can be applied to all corporate bonds but works best on high-yield bonds because they have the most embedded credit risk, according to Backshall.
The model comes out at a time when firms such as Credit Suisse First Boston are also working on enhanced corporate bond models (BW, 1/12) to help investors better identify risks and inefficiencies in corporate bonds.
