Credit Default Risk Assessment of Listed Real Estate Firms Using the KMV Model (Risk and Financial Management)

Summary

• The study uses data from 261 real estate firms listed in mainland China and Hong Kong between 2010 and 2023.p.1
• Distance to default achieves an AUROC of 0.760, indicating moderate discriminatory ability.p.1
• For 161 Hong Kong-listed firms, mean distance to default over 2010 to 2023 is 2.49 and the median is 2.35, across 1,990 valid firm-year observations.p.10
• The minimum distance to default fell to -18.57 in 2023, while the maximum reached 33.83 in 2022.p.10
• The ROC evaluation sample has 77 default observations and 84 non-default observations.p.8
• A statistical analysis of 22 real estate bubble episodes across 15 countries found that more than 40% were associated with risk transmission to the banking sector.p.2

Key insights

1. Chinese credit rating agencies often downgrade only after default; Figure 1 compares ratings of 206 bond issuers around their first default.p.2
2. Among 21 bonds on a Shanghai Stock Exchange early-warning list, only one subsequently defaulted, while 479 bond defaults occurred from 2019 to 2021.p.5
3. The default point is specified as current liabilities plus 0.5 times non-current liabilities.p.7
4. The study uses an estimated default probability of 50% and a BBB- rating as reference warning thresholds.p.8
5. Mean distance to default for the full sample is 2.49 over 2010 to 2023, with substantial dispersion across firms.p.10
6. Mean distance to default dropped to 1.74 in 2022 and 0.00 in 2023, signalling sector-wide credit deterioration.p.11
7. The AUROC of 0.760 supports distance to default as a supplementary tool for credit risk ranking.p.15
8. Distance to default generates more frequent risk warnings than domestic ratings and in some cases, such as ST Yango, warns ahead of downgrades.p.17
9. Under a normal distribution assumption, estimated default probability approaches zero rapidly when distance to default exceeds 4, which may understate extreme risk.p.19