IACPM: Credit managers see dismal 12 months ahead

Credit portfolio managers foresee an unpleasant 12 months ahead as nearly three-quarters of those surveyed believe credit defaults will rise globally during that time period, according to a fourth-quarter survey by the International Association of Credit Portfolio Managers.

In the survey, 73% of credit portfolio managers forecast that average corporate credit default rates will increase during the next 12 months, up from 58% the prior quarter; while 26% believe default rates will remain unchanged (down from 34%) and only 1% believe defaults will go down (a drop from 8%).

Som-lok Leung, IACPM executive director, said in a telephone interview that the negative outlook is the result of a higher confidence that a change in the economic cycle is coming, as well as uncertainty regarding interest rates.

"The default outlook is very, very negative," Mr. Leung said. "After we do the survey, we get some feedback from members and clearly people have been watching for the turn of the cycle for some time, and they're still watching, but there are many more negative signs now. They're more and more negative signs now."

There was little surprise in the results, he added, if you've been watching the news.

"The (Federal Reserve) has been increasing interest rates and there's some uncertainty on how much they're going to do that this year," Mr. Leung said. "The trade issues are still there, and in the U.S. certainly the (government) shutdown has been a recent concern. The issue of Brexit in the U.K., the protests in France, all of these things are creating some trepidation about the future."

The Credit Spread Outlook index for the next three months overall dropped very slightly to -38.4 from -38.2 in the most recent survey, which was conducted in the beginning of January. The Aggregate Credit Default Outlook index for the next 12 months is -71.1, down from -47.2 in the previous quarter's 12-month survey. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

By region, the outlook for corporate credit all dropped. North America's Credit Default Outlook index fell to -75.7 from -43.2, with 78% of respondents saying credit defaults will go up in the next 12 months (compared to 58% in the previous survey) and 19% saying they will be unchanged (compared to 30% in the previous survey). Three percent said defaults will go down in the next 12 months, down from 14% in the third-quarter survey.