- a rating system for european eastern firms






  1. calculates Probability of default (PD) of SME at one year and does associate it to the relevant rating according to the scale S&P;

  2. is built on an econometric approach where the main independent variable is the Margin from default (MfD) which considers debt in one year ,medium -long term debts and current and historical (3 years) EBITDA  of a firm. Between MfD and PD there is an inverse relation: :the higher the former the lower the latter and vice versa;

  3. MfD is well correlated, from statistical view , with macroeconomic pattern (systemic risk) and with internal factors of a firm (hidiosyncratic risk);

  4. Requires just few data: EBITDA of the last 3 years and  existing liquidity, debt in one year, medium- long term debts, total revenues from the last balance sheet;

  5. Does not incur in technical problems which affect models based on discriminating  analysis ;

  6. Allows debtor and lender to calculate the Expected Loss (EL), known Loss Given default (LGD)  and Exposure at default (EAD);

  7.  Initially was elaborated on a data base with balances sheets  of 10 years (2004- 2014)  of 10.000 Italian SME of different sectors and geographic areas. Then it has been yearly  up dated;

  8. It can be applied also to not Italian firms since it is not affected by local and specific factors but by universal factors like data from balance sheet and macroeconomic conditions;

  9. can be applied  by debtors or by lenders to forecast the required level of EBITDA for future obligations.

The main basic principles of model;

  1. Default is considered as a deterministic and not stochastic event;

  2. PD is calculated  as a cardinal, and not ordinal, value in percentage terms according to the regulating approach of Basle 2;

  3. To be far from default it is important not the ratio between net asset and total debt but capability of a firm to reach a level of EBITDA adequate for facing with financial obligations in forthcoming year. Technical default does occur when EBITDA is not sufficient to comply with deadlines of obligations;

  4. Since volatility is always a proxy of risk, the higher historical volatility of Ebitda, the lower MfD.  In such a condition high  probability of default.


Actually the application available on this part of site allowes to calculate probability of default for each one firm individually, but it is ready a more structurated version able to keep in archive all the applications made and to recall them every time it needs. In other words you can get under management the portfolio as a whole and to estimate the change of risk correlated to the changes of individual performance of a firm or all portfolio.


* This is a light version of a more complex model created wich takes in account the most recent regulatory addresses according to new principles in IFRS9.