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IACPM: Credit outlook improved but still cautious

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Credit portfolio manager’s outlook on corporate borrower defaults and spreads on their loans, while still gloomy, has improved somewhat as the pandemic continues.

A sizable majority of respondents, 75%, to the International Association of Credit Portfolio Managers’ (IACPM) most recent quarterly survey say defaults will increase, while 23% said there would be no change, and 3% believed defaults would decrease. Although far from a rosy, the current outlook is an improvement over the survey three months ago, when 95% said defaults would increase.

Meanwhile, 55% of respondents in the recent survey said credit spreads will widen on North American investment-grade debt, and 77% on the region’s high-yield debt.

The IACPM notes that a number of respondents said that while the forecast remains negative, credit conditions appear to be stabilizing and the outlook is clearer.

“The third quarter was, in some ways, a carryover from the last couple of months of the second quarter,” commented Som-lok Leung, Executive Director of IACPM. “Nobody knew what was going to happen in April but by May and June conditions were stabilizing and that has continued into the third quarter.”

Survey respondents noted some sectors are doing well in spite of the economic downturn, such as technology, health care and consumer staples. Others have been impacted more directly by the pandemic, including hotels, airlines and oil and gas.

“We’ll continue to see defaults but where do we top out? That’s the big unknown,” Leung said.

In terms of credit spreads, the survey found 55% saying investment grade spreads will widen, with 39% saying they will remain unchanged, and 6% saying they will tighten. For high-yield debt, respondents were more negative, with 70% forecasting spreads will widen, 18% remain unchanged, and 12% tighten.

The IACPM says spreads are being driven by central bank liquidity measures that will be in place for the foreseeable future. However, while a higher percentage of respondents forecasted defaults increasing than spreads widening, it was still a majority that saw investment-grade spreads widening, and a significant majority for high yield.

Respondents will remain wary about the economy and credit conditions until a vaccine is widely available, the IACPM said, with one respondent noting schools, restaurants and other organizations closed soon after reopening after seeing covid-19 infections increase.

“There is considerable concern there will not be a clear signal that an effective vaccine is widely available and that we can simply go back to normal life,” Leung said. “The reality will almost certainly be messier with different vaccines, different regimes and spotty distribution. It could be a long time before we have real clarity.”

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Credit quality Corporate defaults