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Portfolio managers forecast worsening credit conditions in 3Q

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Concerns over widening spreads in global credit portfolios are at a peak level in the post-crisis era, according to a quarterly survey of global credit-portfolio managers.

Nearly 70% of North American managers – and 82% in Europe – said in a survey conducted in June by the International Association of Credit Portfolio Managers that they believe wider spreads (representing tougher credit conditions for managers) are inevitable in speculative-grade portfolios over the next three months. The IACPM released the survey findings Thursday.

The numbers reflect rising worries over credit conditions which may worsen due to rising Fed interest rates, an end to European quantitative easing, and potential global trade disruption.

“It’s a classic inflationary environment,” Som-lok Leung, executive director of the IACPM, said in a statement. “As interest rates rise, one would expect to see wider spreads and higher defaults and, in fact, this is a trend we’ve seen for the past few months.”

The portfolio managers’ responses made for an increasingly negative outlook on the IACPM’s three-month credit outlook index, which measuring the polled expectations of whether credit spreads will rise, fall or remain static in the next three months.

Managers also expect growing levels of defaults, due to rising interest rate conditions that will challenge more highly leveraged companies in meeting debt obligations.

The IACPM global credit outlook index is at its most negative point since 2008, measuring at a negative (-)66 on a diffuse index ranging from +100 to -100. Negative numbers reflect the level that managers expect credit conditions to deteriorate, with positive numbers showcasing an improving spread environment for managers. A “zero” indicates no expectations for changes in results.

The deepening pessimism was mostly driven by European managers, where only 18% expect improved or similar credit spreads in the third quarter. The European portion of the credit outlook index was a negative (-)77.3, compared to (-)59.4 in March only (-)3.1 in June 2017.

North American numbers actually slightly improved on the credit outlook index, at (-)69.2% from (-)76.5% from the IACPM’s March survey.

But Leung said the North American credit-spread index has been at various negative stages since the end of 2015.

The NA default outlook index – which measures credit default expectations over the next year – furthered a recent negative trend to (-)65.5, widening from (-)57.9 from the spring survey.

Approximately 66% of managers predict higher credit default rates through 2019, and 34% expecting no changes. No respondents projected lower default rates (despite the fact ratings agencies have done so lately).

“Hanging” over the globe, according to the IACPM, is uncertainty over the threat of a global trade war, which could also contribute to default activity.

“At this point, however, while there is some early evidence of a reaction to the threat, such as reduced barge traffic in the US,” the IACPM report stated. “Survey respondents say it is far too early to predict the ultimate impact. Brexit is another concern but, again, the picture is unclear."

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Portfolio management Corporate defaults Spreads