There is a slight breeze of optimism for the first time in over three years about credit conditions for corporate borrowers, according to the latest survey from the International Association of Credit Portfolio Managers.

In the polling results released Thursday morning, managers expect to see rising defaults and wider credit spreads in North America and Europe for the next three months, but the outlook is on the upswingcompared to recent quarterly results.

The latest survey shows first-quarter 2017 corporate default expectations at a negative (-) 29.6 on the IACPM’s diffusion index, in which negative numbers denote expectation for deteriorating credit conditions such as higher defaults and widening spreads. That is an improvement from the more pessimistic (-)50 reading on the index during the third quarter of 2016.

For credit spreads, the index reading of (-)27.3 is an improvement over third quarter’s (-)47.

 “Things are looking somewhat more optimistic than they were before,” said IACPM executive director Som-lok Leung. “The Fed is certainly a part of it. It’s only going to raise rates if they believe things are continuing to look better.

“And secondarily, from what we heard from our membership, oil and gas that was very problematic and worrisome before has stabilized,” he said. He also noted the growing economy (“albeit slow”) as encouraging to managers’ viewpoints.

The IACPM survey results are calculated in diffusion indices, showing positive and negative numbers ranging from 100 to negative (-) 100. Positive numbers show expectations for improved credit conditions in fewer defaults and narrower spreads. Negative numbers denote expectations of credit deterioration.

The index has not been in “all black” positive territory showing full-throated manager optimism since  December 2013, the last time outlooks on corporate credit spreads and defaults across geographic regions and investment-grade/speculative-grade strata were on the upswing.

Leung said respondents were “divided” in the survey, with many surprised the results were not more optimistic given improving economic conditions – underscored by the Federal Reserve’s decision to raise interest rates.

“Cash balances are historically high and people cannot stay uninvested forever,” said Leung.

In North America, the corporate default 12-month outlook read (-)13.9, compared to (-)55.3 in the third quarter. Only about one-third of respondents expect defaults to rise over the next year.

That viewpoint jibes with a recent update by Moody’s Investors Service tracking the lower end of speculative-grade companies: Moody’s reported the number of companies it rates ‘B3’ and lower – those more likely to default – is down 11% through year-end 2016 to 259, falling for the ninth straight month after its record high of 291 last April. (However, as 18% of the speculative-growth universe, that remains above its long-term average of 15%).

According to the IACPM survey, 50% believe credit spreads will widen for investment-grade debt while 51% see them widening for high-yield/leveraged debt. The three month credit spread outlook index is (-) 25.7 for IG, (-)31.4 for HY – both figures improvements from the third quarter. 

The outlook is not so rosy in Europe. Half of survey respondents said defaults will rise in Europe as the UK and the European Union negotiate the Brexit pact. The credit spread outlook on European investment-grade debt is (-)19.4.

The quarterly survey is conducted of credit portfolio managers, including at some of the world’s largest commercial banks, at more than 90 financial institutions in 17 countries.

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