Over two-thirds of credit portfolio managers expect corporate defaults to increase globally over the next 12 months, a significant sign of an economic slowdown.
Among surveyed managers, 75% believe defaults will increase in Europe and 74% believe defaults will increase in North America over the next 12 months, according to a third-quarter survey by the International Association of Credit Portfolio Managers.
The Aggregate Credit Default Outlook index for the next 12 months fell to -56.2 in the most recent survey, down from -45.4 in the previous quarter. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.
Managers are most pessimistic about North America and Europe, which each had an index of -66.7. In the previous quarter, North America's index was -59.5, while Europe's was -42.4.
"I think there's increasing consensus that things are looking worse," said Som-lok Leung, IACPM's executive director, in an interview. "Not everyone is using the word 'recession' yet, but definitely using the word 'slowdown.' "
"They're seeing it in their client' portfolios, firms that are showing up with weaknesses or issues just for the last several weeks to the last month," Mr. Leung said.
IACPM's Credit Spread Outlook index for the next three months overall fell to -25 in the most recent survey, which was conducted in the beginning of October, from -19.1 three months earlier and -3.3 in the first quarter.
"I think it's quite useful and interesting to see the investment-grade index perspectives are actually fairly close to neutral," Mr. Leung said. "In fact, the U.S. one improved and the European one declined. Both are fairly close. The high-yield view for both got worse and markedly worse for Europe."
The Credit Spread Outlook index for the next three months for North American investment-grade credit is -11.4 for the current quarter, up from -21.9 the prior quarter and the outlook index for North American high-yield credit fell to -42.9 from -34.4 the previous quarter. Europe's index dropped to -12 from -7.7, and the Europe crossover index plummeted to -32 from -8.
Mr. Leung said the numbers mean managers are much more concerned with smaller, less well capitalized companies more than their larger counterparts.
"I think really if people are expecting more impact on high-yield firms than on investment-grade firms," Mr. Leung said, "it's probably more of a downward slope than a drop off the cliff. If it's a drop off the cliff, then investment-grade is also affected."
The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 100 financial institutions in the U.S., Europe, Asia, Africa and Australia.