Bleakest Default Outlook Since 2008

New York, NY – A majority of IACPM members responding to the Association’s quarterly Credit Outlook Survey believe the world will mostly recover from the effects of the Corona virus and the near shutdown of the global economy by the end of the year. At the same time, a significant minority, 44%, do not expect conditions to be ‘normal’ before the end of June 2021 or even later.

“Virtually every member of the Association has put together multiple forecasts over the last couple of months and, each time, the outlook for corporate debt has gotten worse,” said Som-lok Leung, the Executive Director of the International Association of Credit Portfolio Managers. “One of our members commented that her institution changes its views almost every day and is increasingly questioning its clients’ ability to weather the storm, even with government help.”

The outlook for rising global corporate debt defaults over the next 12 months is the most pronounced since the first outlook survey was taken at the end of 2008 at the beginning of the Great Recession. The Average Corporate Credit Default Outlook Index stands at minus -89.9 with fully 90% of respondents expecting defaults to increase around the world. The average default index in the first survey conducted in 2008 was minus -96.6.

“One of our member institutions is currently forecasting a ten percent default rate which is largely in line with expectations for the leveraged loan market,” commented Mr. Leung. “But bear in mind, we’re seeing a paradigm shift. The challenge for a lot of our members is what’s going to happen to office rents or retailers, restaurants and other yellow page businesses. A number of them won’t come back.”

At the same time, some respondents note many commercial businesses have considerable resources and they will not only survive, they will thrive once the economy reignites. Association members note central banks are acting aggressively and appropriately. Governments are also enacting massive spending programs. Further, global financial institutions are in considerably better shape than they were during the last recession. Banks are better capitalized and more liquid, enabling them to withstand the current downdraft.

“Governments and financial institutions are doing what they’re supposed to do,” noted Mr. Leung. “They understand we’re in a war and they’re reacting completely appropriately.”

While sharply negative, the outlook for credit spreads still, at least partly, reflects the surge in liquidity. The outlook for North American investment grade debt, for example, is negative -46.7 but, at the same time, fully 40% of respondents expect spreads to either remain the same over the next three months or to actually decline.

The Credit Outlook Survey is conducted among members of the IACPM, an association of more than 100 financial institutions in over 20 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 currently 115 member institutions located in 25 countries world-wide, is a professional association dedicated to the advancement of credit portfolio management. Founded in 2001, the organization’s programs of meetings, studies, re-search 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.