Transcript Slide 1

Corporate Default Risk:
Charter Communications
GSB F320 Debt Markets, February, 2007
Andreas Eckner (RA) and Darrell Duffie
1
Equity Value
7
6
5
$bn
4
3
2
1
0
2000
2001
2002
2004
2005
2006
Date
2
Long- and Short-term Debt
20
Long-term Debt
Short-term Debt
18
16
14
$bn
12
10
8
6
4
2
0
2000
2001
2002
2004
2005
2006
Date
3
Short + ½ Long-term Debt
11
10.5
10
9.5
$bn
9
8.5
8
7.5
7
6.5
6
2000
2001
2002
2004
2005
2006
Date
4
Implied Total Assets
16
15
14
$bn
13
12
11
10
9
2000
2001
2002
2004
2005
2006
Date
5
Everything Combined
16
Implied Assets
Debt (ST+1/2*LT)
Equity Value
14
12
$bn
10
8
6
4
2
0
2000
2001
2002
2004
2005
2006
Date
6
Distance to Default
6
5
4
DTD
3
2
1
0
-1
2000
2001
2002
2004
2005
2006
Date
7
Empirical Relationship (1980-2004):
DTD and One-year Default Probability
0
10
-1
10
Default Prob
-2
10
-3
10
-4
10
-5
10
-2
0
2
4
DTD
6
8
10
8
5yr CDS Rate
2800
2600
2400
Basis Points
2200
2000
1800
1600
1400
1200
1000
Aug04
Nov04
Feb05 May05 Sep05 Dec05 Mar06
Date
Jul06
Oct06
Jan07
9
Default Intensity (Frailty Model)
Duffie, Eckner, Horel, Saita (2006)
t  exp1.031.20DTDt  0.65Rett  0.26r3m,t 1.56SnPt  0.13Yt 
DTDt
… distance to default at time t
Rett
… trailing 1-year stock return
r3m,t
… 3-month interest rate
SnPt
… trailing 1-year return of S&P 500 index
Yt
… frailty variable at time t
10
Default Intensity (no Frailty)
Duffie, Eckner, Horel, Saita (2006)
t  exp 2.09 1.20DTDt  0.68Rett  0.11r3m,t 1.48SnPt 
DTDt
… distance to default at time t
Rett
… trailing 1-year stock return
r3m,t
… 3-month interest rate
SnPt
… trailing 1-year return of S&P 500 index
11
Historical Default Intensity
0
10
-1
10
-2
10
-3
10
-4
10
Frailty Model
No Frailty Model
Risk Neutral
-5
10
2000
2001
2002
2004
Date
2005
2006
2008
12