IACPM survey mixed on 1Q credit conditions, long-term default outlook

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Asset managers appear mixed on whether credit conditions on spreads and corporate defaults will worsen in 2020 – or remain at today’s benign levels, according to a new quarterly survey.

But few expect any near-term improvement.

The International Association of Credit Portfolio Managers released it latest credit outlook survey Thursday showing that respondents to its poll are “evenly split between those who think conditions will get worse, remain at today’s benign levels.” About 48% of respondents said corporate defaults will rise globally this year, while 47% believe they will remain at the same level.

Only a handful of those polled either believed credit conditions might improve for managers.

“We’re clearly late in the economic cycle but conditions haven’t gotten any worse, largely because central banks have added liquidity to keep economies going,” Som-lok Leung, executive director of the IACPM, said in a press release. “The cycle will turn at some point but when? In six months? Who knows?”

According to the survey, 50% of respondents believe credit spreads will widen over the next three months for high-yield debt vehicles, including speculative-grade leveraged loans that are acquired by managers of collateralized loan obligations. Only 37% believe they will remain unchanged. Widening spreads point to worsening credit conditions for portfolio managers, increasing the amount paid out to investors against the cost of funds. Only 13% believe they will tighten in high yield.

In regard to corporate defaults, 59% see defaults increasing over the next year while 38% believe they will be unchanged. Only 3% see defaults decreasing.

The mixed results stem from global economic and political conditions that appear to have been placed on the “back burner,” said Leung, compared to the worries they entailed earlier in 2019. Those concerns include the U.S.-China trade war, Brexit, energy prices and Iran.

“Things seem calmer at the moment and the [Trump] administration, which has been the key driver on trade, would seem to have bigger fish to fry,” said Leung.

“That could change quickly, of course, and while we can’t say the issues concerning trade are completely resolved, we seem to have gone from a rapid boil to a white simmer.”

The quarterly credit outlook survey is conducted among IACPM members at 100 financial institutions in 20 countries. Members include portfolio managers at the world’s largest commercial banks, investment banks and insurance companies.

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