Disconnect Between Credit Professionals and Financial Markets

IACPM Credit Outlook Survey Forecasts Rising Defaults and Wider Spreads, Spotlighting Disconnect Between Credit Professionals and Financial Markets

New York, NY – Responding to inquires for the second quarter IACPM Credit Outlook Survey, association members, who are credit professionals responsible for managing corporate loan portfolios, forecast wider credit spreads over the next three months and rising loan defaults over the next 12 months. The latest reading for the IACPM’s major market credit spread index is negative -56.9, while the result for the association’s aggregate credit default outlook index is minus -83.5.

The forecasts are a stark contrast to results in global financial markets which, after a steep drop at the onset of the coronavirus pandemic, have largely recovered. Most global equity markets are at or near where they started the year, while major market credit spreads tightened considerably over the last quarter.

“There’s a clear disconnect between the markets and credit portfolio managers,” commented Som-lok Leung, Executive Director of the IACPM. “The markets are focused on central banks and their liquidity moves, as well as governmental fiscal action, while our members are looking at financial results from borrowers every day and, to quote one of them, the numbers are lousy. Certainly in the U.S., the pandemic is spreading and loan customers are getting hit harder and harder.”

Ninety five percent of survey respondents believe corporate credit defaults will rise in North America over the next year, while 91% of respondents think corporate defaults will climb in Europe.

“There are new virus hot spots popping up every day,” noted Mr. Leung, “and we don’t know what the impact will be. Everyone is looking for a vaccine but that may not happen until early 2021 and, in the meantime, many survey respondents expect to see significant destruction in the economy.”

Many IACPM members believe corporate loan borrowers will feel the real impact of the virus on the economy in the fall. Most borrowers will get through the summer, which is typically a slower period, but, in the fall, companies will need to find new liquidity and that could be challenging.

“A lot of companies in the U.S. are experiencing major structural changes,” said Mr. Leung. “Retailers, for example, may be looking at a Yellow Pages moment, as many iconic businesses, such as Brooks Brothers, J. Crew and Debenhams, file for bankruptcy protection. Some companies will survive but others will not.”

The Credit Outlook Survey is conducted among members of the IACPM, an association of 115 financial institutions in 25 countries around the world. Members include portfolio managers at many of the world’s largest commercial banks, investment banks and insurance companies, as well as a number of asset managers. Members are surveyed at the beginning of each quarter.

Survey results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to minus -100, as well as no change which is in the middle of the scale and is recorded as “0.0.” Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation of deterioration with higher defaults and wider spreads.

Please click here> to access a selection of aggregate survey data.

The full aggregated survey results will be published with a 6 months time lag in the members only section of our website. Please click here> to access prior quarters’ survey results.

The IACPM, with 115 member institutions located in 25 countries, is a professional association dedicated to the advancement of credit portfolio management. The organization’s programs of meetings, studies, research and collaboration are designed to in-crease awareness of the value and the function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.