Quantitative models used to identify potential defaults and ratings shifts in the corporate bond market are gaining in popularity given the shocks of Adelphia, WorldCom and numerous other Chapter 11 filings, say investors and executives at the two independent providers of this software.
Specifically, investors point to Creditsights and Moody's/KMV. Jim Claire, head of Evergreen Investment Management's fixed-income trading desk, says he is "of the mind that canceling a subscription to Moody's Investors Service, taking the saved money and getting default research from these independent vendors is probably money very well spent." Beth Donoghue, head of Hypovereinsbank's proprietary loan trading desk, says she uses both KMV/Moody's and Bondscore from Creditsights. "These are indispensable for someone like me," she says. An example of a trade where she says her desk has profited is the telecom sector, in that given the alerts from the KMV model, "we had fully traded out of this sector by 2000." Another one is Tenet Healthcare, "where we were able to anticipate its upgrade to investment-grade status almost a month ahead of time."
Paul Ciasullo, ceo of fixed-income research vendor Creditsights, says Bondscore, which was introduced in the first quarter this year, is gaining increasing popularity among investors who use it to determine how much derivative credit protection they need to hedge their positions. He says the proof of the predictive efficacy of these models is seen in the fact that the [default model driven] swaps market "has been significantly ahead of the curve in most every major credit deterioration story in the past year." Ciasullo also argues that investors are interested in offerings from vendors that are independent of the major dealers, given the research controversies of the past year.
Lindsay Dimas, head of media relations at Moody's/KMV, whose models have been in the market since 1989, agrees that the pain of corporate bond and loan players has translated into economic gain for her firm's product.