Credit risk managers remain cautious about financial markets, the latest International Association of Credit Portfolio Managers (IACPM) credit outlook survey finds.
Participants are evenly split on whether corporate defaults will rise or remain steady in the next year; only 6% foresee a decline. The Corporate Default Index is -40.1, less negative than -67.8 three months ago.
"There's no single event triggering a crisis, but there are many risks out there that could become the thing that causes it," said Som-lok Leung, executive director of IACPM. "The war in Iran, for instance, one minute it seems like it's over, and it's back on. And yet the financial markets are not cratering because of that."
He also highlighted the unexpected risks of AI, citing Anthropic's decision to halt the rollout of Mythos after identifying cybersecurity risks.
As loans come due, certain types ... tend to roll over, and it's very hard to predict what things will look like in the longer term.
In some ways, it will resemble the early 2000s at the beginning of the Internet boom.
"AI is going to have a huge impact on the future workplace in terms of the types of jobs that will likely be cut, and who the winners and losers will be. Some companies will benefit, and others will not do as well, and it's very difficult to say which ones are which at this point," Leund stated.
He pointed to heavy investment in data centers and infrastructure, saying managing this concentration is a key concern, especially given the uncertainty of long-term financing.
"As loans come due, certain types of financings tend to roll over, and it's very hard to predict what things will look like in the longer term. That's one of the key things to be wary of," Leung said.
The market generally struggles to gauge the impact of current geopolitical events on credit events, according to Richard Gumbrecht, CEO of Secured Finance Network (SFNet), an international trade organization for the asset-based lending and factoring industries.
"Lenders, of course, need to be vigilant for changes, but based on the financial results being reported by the large banks for the second quarter, credit quality appears to be holding up very well for both corporate and retail credit," Gumbrecht said.
Relative value in ABS and CLOs
When it comes to credit, broadly speaking, spreads across the board are at very tight levels whether the product is investment grade,high-yield corporates, ABS, CLOs, or CMBS, according to Jeffery Elswick, managing director at Frost Investment Advisors.
For the last 12 months, in both on-the-run ABS and IG corporates, "we've seen spreads trade at a very tight range. We could be in this environment for quite a while, but eventually it's going to give, and we just don't know when," Elswick said.
That is not the story for the entire market, however, Elswick explained. All-in yields are holding up the credit markets. "That's helping keep liquidity in the market. But the bottom line is that, on a relative value basis, credit is essentially expensive," he said.
CLOs have indirect exposure to the software and artificial intelligence industries, because so much of the market is backed by loans from that sector.
"We are seeing a slight degradation of some of the CLO managers in that space, but nothing alarming. In general, as it relates to CLO performance, we think some of the cheapest sectors of tradeable U.S. fixed-income are at the top of the capital stack—triple-A and double-A senior bonds. Below that, you start delving into the triple- and double-Bs, where the aggregate spread levels are much wider, but not what we characterize as cheap," he said.
