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Moody's Starts Accounting-Based Default Predictor

Moody's Investors Service has recently begun offering its investor clients an accounting-based crystal ball designed to predict the likelihood of defaults by non-financial U.S. corporates within a year.

Moody's Investors Service has recently begun offering its investor clients an accounting-based crystal ball designed to predict the likelihood of defaults by non-financial U.S. corporates within a year. Jerome Fons, managing director of Moody's credit policy group, said the indicator is novel because it offers a purely financial ratio view of credit risk that is independent from traditional market indicators.

The model is a statistical tool that essentially spits out a score indicating the likelihood of default based on a variety of factors including a company's financial leverage and liquidity. If it says a company is high-risk, the model has the ability to point to the problematic area of a company's financials. Non-financials are grouped together because they use similar accounting forms, file with the Securities and Exchange Commission and have more similar risks and liquidity concerns.

"Most of the popular, widely-used models are price-driven," said Fons, who added the new model was initially intended for internal use only, but in response to investor demand Moody's is offering the accounting-based model externally. Moody's expects to also come out with default predictor models for banks, insurance companies and international firms, as well as models predicting default over a longer horizon, said Fons.

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