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Portfolio managers expect slow post-pandemic recovery for credit conditions

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A quarterly survey shows a major cross-section of portfolio managers it may be more than a year before global credit conditions return to normalcy from the economic havoc unleashed by the COVID-19 pandemic.

The new credit outlook survey released Thursday by the International Association of Credit Portfolio Managers shows that while most believe the global economy can recover from its near shutdown, a “significant minority” of 44% of respondents do not expect favorable market conditions for corporate default and credit-spread outlooks to return to “normal” until June 2021.

“Virtually every member of the Association has put together multiple forecasts over the last couple of months and, each time, the outlook for corporate debt has gotten worse,” said Som-Lok Leung, executive director of IACPM, in a press release. “One of our members commented that her institution changes its views almost every day and is increasingly questioning its clients’ ability to weather the storm, even with government help.”

Nearly 90% of respondents project that corporate default levels will increase over the 12 months, with most forecasting defaults rates of at 10% — which is “in line with expectations for the leveraged loan market,” according to Leung. “But bear in mind, we’re seeing a paradigm shift. The challenge for a lot of our members is what’s going to happen to office rents or retailers, restaurants and other yellow page businesses. A number of them won’t come back.”

Several respondents, however, noted that many commercial businesses will “not only surve, they will thrive once the economy reignites,” according to the IACPM press release, due mostly to government and central bank intervention worldwide and the fact North American and European banks are well-capitalized to withstand current headwinds.

At least 40% of respondents expected credit spreads to decline over the next three months (a positive trend for managers), as the effects of ample liquidity among many corporate borrowers takes shape.

The quarterly IACPM survey involved managers at more than 100 institutions across commercial banks, investment banks, insurance companies and asset managers.

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IACPM Asset managers