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

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.