distinct from those failed later. The results suggest that the MNL model is able to
classify the firms into the two groups with overall accuracies as indicated in Exhibit
10.19 for the first and the second sample sets. Type I and Type II accuracy rates could
not be reported here because this information is not available in the study.
10.21 MEXICO
(a) Altman, Hartzell, and Peck (1995). The authors assert that emerging markets
credits should be initially analyzed in a manner similar to traditional analysis of U.S.
corporates. Once a quantitative risk assessment has emerged out of traditional analy-
sis, it can then be modified by the qualitative assessments of an analyst for other
risks, such as currency risk and industry risk characteristics of the industry itself as
well as the firm’s competitive position in that industry. It is not often possible to build
a model specific to an emerging country based on a sample from the country itself
because of the lack of credit experience in that country. To deal with this problem,
the authors have modified the Altman Z-Score model and renamed the resulting
model as the EMS model (Emerging Market Scoring Model). The revised model uti-
lized the first four of the original five variable Z-score (1988) model, with weightings
determined by a new set of computer runs.
The process of deriving the rating for a Mexican corporate credit is:
1.EMS score is calculated and equivalent U.S. bond rating is obtained based on
the calibration of the EMS scores with U.S. bond rating equivalents.
2.The company’s Eurobond bond is then analyzed for the issuing firm’s vulnera-
bility to servicing its foreign currency denominated debt. This is based on the
relationship between the nonlocal currency revenues minus costs compared to
nonlocal currency expenses. Then, the level of nonlocal currency cash flow is
compared with the debt coming due in the next year. Depending on the degree
of vulnerability seen by the analyst, the rating is adjusted downward, or remains
the same in the case of little vulnerability.
3.The rating is further adjusted (up or down) if the company is in an industry
considered to be relatively different from the bond equivalent rating attained
in step 1.
4.The rating is further adjusted up or down depending upon the dominance of the
firm’s position in its industry.10.21 MEXICO 10 • 43Sample No. 1 Sample No. 2*
Accuracy Accuracy
Years of Failure % %
1 vs. 2, 3, 4 73–75 65–70
2 vs. 3, 4 60–67 57–65
3 vs. 4 50–52*There are no firms with data extending beyond 3 years prior to failure.Exhibit 10.19. Classification Accuracy.