Despite Positive Results, Concerns Remain
New York, NY – The IACPM Credit Outlook Survey turned sharply positive in the latest reading, with a forecast of easing default risk and tighter credit spreads. The survey, conducted among members of the International Association of Credit Portfolio Managers at the beginning of April, showed strong agreement that fewer loans will default over the next 12 months, especially among corporate and even retail credits. The IACPM Aggregate Credit Default Outlook Index stands at 37.7 for the first quarter, the most positive result since the survey was initiated at the end of December 2007.
“There is broad agreement among credit portfolio managers that the recovery is established and well underway,” commented Som-lok Leung, Executive Director of the IACPM. “For example, 68 percent of survey respondents expect corporate defaults to fall over the next year, while just seven percent expect them to increase.”
The IACPM Major Markets Credit Spread Outlook Index also continued to be positive in the first quarter, standing at 38.8. At the same time, however, many survey respondents are cautious. For example, while 47 percent of respondents expect investment grade spreads in North America to tighten over the next three months, fully 43 percent expect them to remain unchanged. Spreads have tightened rapidly over the past year, leading to concern that they tightened too much, too soon.
“The real question is whether the market has gotten ahead of itself in terms of pricing risk,” said Mr. Leung. “Our members strongly believe the risk of default has significantly declined but there is considerable concern that the market has gone too far in anticipating recovery.”
The quick return of more lenient loan covenants, for example, is one area of concern. Some survey respondents are concerned market participants are moving too quickly into the kind of riskier structures that proved so destructive just a few years ago. They wonder if the market is overly jubilant or if there is too much liquidity in the system.
“Central banks pumped enormous amounts of money into the global markets to prevent the financial crisis from getting even worse,” noted Mr. Leung. “But now there is concern about effect of that liquidity on asset prices and structures.”
Survey respondents are members of the International Association of Credit Portfolio Managers, or IACPM, which consists of credit portfolio managers at more than 80 leading banks and financial institutions in 12 countries in the U.S., Europe and Asia. They were surveyed at the end of the first quarter. The results are calculated as diffusion indexes, which show positive and negative values ranging from 100 to -100, as well as no change which is in the middle of the scale and is recorded as “zero.” Positive numbers signify an expectation for improvement in credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation for deterioration with higher defaults and wider spreads.
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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 83 member institutions located in 12 countries, is a professional association dedicated to the advancement of credit portfolio management. Founded in 2001, the organization’s programs of meetings, studies, research and collaboration are designed to increase awareness of the value and function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.