Consulting project for Banco Invest: development of internal rating model - comparison with Altman´s model

Abstract

This work develops a model for attributing internal ratings to Portuguese non-rated non-financial companies. Using an extensive data sets panning from 2002 through 2018, six financial ratios and one non-financial variable were used to predict the probability of bankruptcy in the horizons of one, two, three, four and five years, conditional on the survival until the previous year. For the prediction of the probabilities a logit model was used. These probabilities were later aggregated into a five-year bankruptcy probability that was used to map the company-year observations to the ratings of major rating companies, based on maintaining a similar rating distribution.