Default Correlation Among Non-Financial Corporate Affiliates

Abstract

Based on an analysis of 152 non-financial corporate families with multiple rated entities at the time of their defaults, the authors find that when one affiliate defaults all of its affiliates default about 80% of the time, while at least one affiliate avoids default 20% of the time. Firm characteristics that increase the likelihood that at least one affiliate avoids default include: investment-grade ratings within three years of default, the presence of regulated affiliates, the presence of international affiliates, the presence of utilities or media affiliates, and a large number of affiliates in the family. Among these characteristics, only the presence of investment-grade ratings and regulated affiliates were statistically significant in a multivariate regression model. Rating differentials across affiliates tend to be wider across affiliates when some affiliates avoid default. The magnitude of rating differentials within the family one year prior to default is the single most important predictor of whether or not some affiliates avoid default.