Forecast Still Positive for Credit Spreads and Defaults but Down From Previous Survey
New York, NY – Respondents to the latest IACPM Credit Outlook Survey are still optimistic about future credit conditions but their confidence has noticeably waned. The survey, conducted at the beginning of April among members of the Inter-national Association of Credit Portfolio Managers, forecast fewer defaults over the next 12 months with an index score of 19.4 and tighter credit spreads over the next three months with a positive score of just 7.5. That compares with 34.3 for defaults and 41.7 for credit spreads in the previous survey taken at the beginning of January.
“The results may initially seem surprising given continuing economic recovery,” said Som-lok Leung, Executive Director of the IACPM. “However, there are certainly a number of headwinds that are giving people cause for concern.”
Globally, respondents point to a number of troubling developments, unrest in the Middle East, the earthquake, tsunami and nuclear fallout in Japan and the ongoing European sovereign debt crisis. Additionally, there are growing concerns about infla-tion and the prospects for higher interest rates, as well as signs of slowing economic growth, for example, weaker retail spending in the UK.
Respondents are clearly divided, however, in their views. When asked where credit spreads are heading, answers were across the board as some said wider, others said tighter and a significant number predicted they would remain the same. For example, when asked about investment grade debt in Europe, 36% said spreads will widen, 33% expected no change and 31% think they will tighten.
“Europe is clearly still suffering an overhang from the sovereign debt crisis,” said Mr. Leung, “but throughout the markets, people have mixed views about spreads. Some remain optimistic while others may feel parts of the market are overdone.”
Respondents still generally believe there will be fewer defaults over the next 12 months but even here, optimism has eroded. Forty seven percent of respondents in the latest survey believe corporate defaults will decline, 37% think the rate will remain unchanged, while only 16% forecast higher defaults. Nevertheless, compared to the previous survey, the results are markedly down. The new index reading is 30.7 for corporate defaults, noticeably lower than the 53.0 registered in January. Similarly, the index forecast for consumer defaults is 23.1 compared to 35.0 in the previous survey.
“Rising interest rates are a potential problem but people are still mostly comfortable that an improving global economy is easing pressure on companies and con-sumers,” commented Mr. Leung. “At the same time, however, there are overall concerns and, specific to credit quality, there is growing unease with the increasing willingness on the part of investors to take on more risk and the subsequent reemer-gence of cov-lite loans.”
Europe is also clearly viewed differently from the U.S., especially in terms of investment grade debt. Respondents expect tighter spreads in the U.S., registering a positive index score of 22.9, compared to negative -4.4 in Europe. Forecasts for spreads on high yield debt are closer but still more benign for the U.S., with index readings of 12.5 for the U.S. and minus -2.2 in Europe. As noted earlier, the ongoing sovereign debt crisis appears to be continuing to weigh on Europe.
Survey respondents are members of the IACPM, which consists of credit portfolio managers at 90 financial institutions in 17 countries in the U.S., Europe and Asia and include many of the world’s largest commercial banks, investment banks and in-surance companies, as well as a number of asset managers. Members are surveyed at the beginning of every 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.
Please click here to access a selection of aggregated 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 90 member institutions located in 17 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.