Distance to Default
Corporate Credit Analysis glossary · Corporate Credit Analysis
Definition
In the Merton structural model, the number of standard deviations between asset value and the default barrier; a higher DtD implies a lower point-in-time PD.
Distance to Default in plain English
"Distance to Default" is a way of asking: how much financial cushion does a company have before it can't cover its debts? Picture the company's total asset value as water in a tank, and its debt level as a danger line near the bottom — default happens if the water drops to that line. Distance to Default measures how far above the line the company sits, but in units of "how wildly the water level normally swings" (standard deviations). A big distance means it would take an unusually bad swing to hit trouble, so the point-in-time probability of default (PD) is low; a small distance means it's dangerously close.
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