Credit managers are less pessimistic about widening spreads over the next three months, but are growing more worried about a worsening global corporate default trend.
In the latest quarterly credit outlook survey released Thursday by the International Association of Credit Portfolio Managers (IACPM), fewer credit managers expect spreads to widen in the second quarter than there were in the fourth-quarter survey released last December.
In the IACPM’s three-month major market credit spreads outlook showed a negative (-)38 score on its diffuse index used to calculate credit managers’ consensus on credit-spread direction.
The survey results are calculated as diffusion indices, on a scale of 100 to minus (-) 100. Positive numbers on the index indicate expectations for improved credit conditions (fewer defaults and narrower spreads) and negative numbers indicate expectations of credit deterioration.
That compares to negative (-)55 in December, when a wide assortment of credit managers had driven the index past the low-mark of 2015 when the third-quarter outlook projected widening spreads across investment-grade and speculative-grade debt in both North America and Europe.
A substantial majority also see a rising number of defaults in the next 12 months, an assessment that is universally supported by projections from ratings agency analysts.
“The US stock market has bounced back from the beginning of the year and the leveraged loan market at least has a pulse,” said Som-lok Leung, executive director of the IACPM, in a statement. “But global markets are still facing significant headwinds. U.S. interest rates could rise in the near future, energy prices are better but still low, Asia remains murky and Europe is contending with Brexit. Clearly, there’s no shortage of problems.”
According to the IACPM, underlying economic concerns are in part of “every market segment” covered by the survey, “as well as every global region,” according to a statement. The IACPM reports 58% of respondents expect defaults to increase in consumer and retail mortgage debt; 54% see higher defaults in commercial real estate and 68% see corporate defaults rising over the next year.
In North America, 85% see corporate defaults rising, and only 3% expect a drop.
On Monday (well after the IACPM poll had been tallied), Moody’s Investors Service stated it had reaffirmed its assessments that the corporate default cycle had turned and was on the rise. The global corporate default rate is expected to rise to 4.3% in the second quarter and in one year to 4.6% from the current 3.8% level – with defaults in the troubled energy sector leading the way.
The new forecast emerged after a quarter in which 33 Moody’s rated issuers defaulted, with two-thirds from the oil & gas and mining sectors. Thirteen of 18 leveraged loan defaults in the first quarter were in the U.S. and pushed the issuer-weighted U.S. loan default rate to 2.8% in the first quarter, compared to 2% in the fourth quarter of 2015.
The IACPM 12-month credit-default outlook index for North America fell to negative (-)82.1 from last December’s (-)65.0, indicating a strong consensus of growing defaults.
The pessimism over defaults is not so stark in Europe. While 49% believe corporate defaults will rise in Europe, 43% think the rate will remain unchanged; as many as 9 percent believe they will decline.
“The European corporate debt market is benefiting from the [European Central Bank]’s quantitative easing program and also the fact that investors are chasing the same loans,” stated Leung, in the release. “Beyond this, however, there are still concerns over the possibility the British electorate will vote to leave the European Union, as well as general concerns about the strength of the economy.”
The IACPM member survey involves credit portfolio managers at more than 90 financial institutions in 17 countries in the U.S., Europe, Asia, Africa and Australia, and include the world’s largest commercial banks, investment banks, insurance companies and asset managers.