S&P 500 Information Technology: Median Distance to Default

## What this measures

The distance to default of the typical S&P 500 Information Technology company (GICS sector). Merton (1974) model, solved the KMV way: each company's equity is treated as a call option on its assets, struck at a default point of short-term debt plus half of long-term debt (finance leases included, operating leases not) from its latest 10-Q or 10-K that was public that day. Equity value = the day's close × the current SEC share count; equity volatility = the last 252 daily returns, annualized; risk-free rate = the 1-year Treasury yield; horizon one year. The two model equations are solved for asset value and asset volatility, and distance to default = (ln(V/F) + (r − σ²/2)) / σ: the number of standard deviations the company's asset value sits above its default point. Published only on days at least 70% of the sector's members, and at least 10 companies, have a reading.

## Why it matters

Sectors carry very different leverage. Comparing each sector with its own history shows where equity cushions are thinning.

## How to read it

Higher is safer. Compare a sector with its own past, not with other sectors: utilities and real estate carry more debt by design.

## What it does not say

It is a model reading, not a rating or a forecast of default. The Merton probability (N(−DD)) is risk-neutral and badly calibrated in the tails; use the distance for ranking and change over time. Share counts are today's, so earlier days ignore buybacks and issuance. Financial companies are excluded (deposits are not debt in this sense). Companies that report no debt, or tag it only with their own XBRL extensions, have no default point and are left out (29 of 425 when this was built). Today's index membership is applied to past days. Volatility is an equal-weighted year of daily returns, so a volatile week lowers the reading for a year and then drops out at once, which moves the line in steps (April 2025 in, April 2026 out).

## Source

Palanor calculation from SEC EDGAR XBRL filings (debt, public domain), licensed daily closes and the U.S. Treasury 1-year yield.