A new estimation of default probabilities based on non-performing loans

•We predict the default probability of Spanish NFC using various econometric models.•We define default as having NPL for at least three months in a year.•We provide an earlier prediction of distress, before firms file for bankruptcy.•We evaluate the default probability of firms after a public aid pr...

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Bibliographic Details
Published in:Finance research letters 2024-04, Vol.62, p.105149, Article 105149
Main Authors: Blanco, Roberto, Fernández-Ortiz, Elena, García-Posada, Miguel, Mayordomo, Sergio
Format: Article
Language:English
Subjects:
Default
Financial distress
Logistic regression
Non-performing loans
Program evaluation
Transition matrices
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Summary:•We predict the default probability of Spanish NFC using various econometric models.•We define default as having NPL for at least three months in a year.•We provide an earlier prediction of distress, before firms file for bankruptcy.•We evaluate the default probability of firms after a public aid program.•We construct credit rating transition matrices. We model the one-year ahead probability of default of Spanish non-financial corporations. While most of the literature defines default based on bankruptcy filings, we define default as having non-performing loans during at least three months in a given year. This broader definition allows to predict firms’ financial distress at an earlier stage, before their financial conditions are too deteriorated. We also carry out two applications of our prediction models: we assess a program implemented by the Spanish government to provide direct aid to firms severely affected by the Covid-19 crisis and we construct credit rating transition matrices.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2024.105149