Edward Altman Launches Rating Tool

April 5, 2010 by · Leave a Comment
Filed under: General, The Rating Agencies 

Default expert Edward Altman has teamed with RiskMetrics Group to offer credit ratings on North American companies. Altman will initially be rating approximately 2,600 U.S. and Canadian companies with sales of $50 million or more.

“We are excited about it being a significant improvement over existing models that are out there and providing probability of default estimates that are very important to investors,” Altman is quoted by Reuters. Altman maintains that the new venture will not compete directly with traditional rating agencies like Standard & Poor’s, Moody’s or Fitch.

Rating agencies evaluate companies based on their probability of default. Instead Altman’s tool produces a precise default probability in percentage terms over one- and five-year periods. These probabilities are calculated using a “Z-Metrics” credit analysis tool, a new generation of the Z-Score originally introduced by Altman in 1968 to predict corporate defaults.  Hooray for Altman.  Let’s have the market decide if his business has value.  The market produces solutions to problems in time, if Congress doesn’t impede progress.  Let’s hope the financial reform doesn’t kill this business.

“The accuracy level in terms of predicting defaults and non-defaults is considerably higher than both rating agencies and the old Z-score models,” Altman said.

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