A global quarterly survey of credit portfolio managers indicates most believe government stimulus programs have helped ease pressure on default risks and kept spreads at more favorable levels.
But many are also questioning the long-term impact of low-interest business loans, if and when legislative and central bank efforts are eventually withdrawn in a post-recovery period,.
In particular is the concern whether stimulus programs are creating market conditions where their absence in the event of a recovery will create new problems for businesses and investors, said an executive with the International Association of Credit Portfolio Managers.
Credit managers are “increasingly concerned about the long-term impact of all the stimulus,” noted Som-Lok Leung, executive director of the IACPM. “What will be the impact on inflation, on interest rates and what will that mean to our banking clients? Low interest rates are helping them now but what happens if or when rates rise?”
“Stimulus programs, not just in the U.S. but all over the world, have been very helpful,” said Leung, in an interview with Asset Securitization Report. “A new round of PPP, all these things are helpful in the near term.
“But longer term, it’s hard to predict how many companies are saved by these support programs, or just extending out the day of reckoning for them.”
Due to such worries, the IACPM found that a large share of respondents expect rising default levels among corporate debt issuers in the coming three months, as well as widening credit spreads that increase funding costs — although the outlook is not as dire among them as it was in previous quarters as the global economic impact of COVID-19 first began taking shape.
While a third-quarter survey showed 55% of managers expected wider spreads by year-end 2020, for example, the new polling shows only 34% expect North American investment grade credit spreads to widen through March. Also, the IACPM’s credit spread outlook and credit default indices are at more positive readings than they were three months ago.
“We’ve been pretty pessimistic, and on balance still are pessimistic,” said Leung. “It’s just less negative.”
And while respondents expect wider spreads, Leung pointed out that ongoing projection is perhaps a “technical” issue of how low interest rates are for corporate borrowers — “so low, they cannot be expected to move much lower,” according to an IACPM press release on the survey.
In the group’s credit spread outlook, the survey results (expressed through an array index, in which negative numbers indicate expectations for wider spreads), the reading of (-)25.8 compares favorably to the (-)57.1 in the survey released last October. (The survey tracks opinions in European and North American investment-grade and high-yield markets).
Similarly, fewer respondents are projecting rising credit defaults occurring over the next year, although they remain in the majority of those polled. The corporate credit default outlook index reading of (-)51.1 is down from the third quarter number of (-)72.7 and the second quarter result of (-)83.5.
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The quarterly IACPM survey involved managers at more than 100 institutions across commercial banks, investment banks, insurance companies and asset managers.
