Credit managers still pessimistic on defaults – IACMP

Most credit portfolio managers remain pessimistic and expect credit defaults to continue to rise in all regions over the next 12 months, according to the third-quarter survey from the International Association of Credit Portfolio Managers.

When asked how corporate credit default rates will move over the course of the next 12 months, 83% said defaults will increase during that period. When asked the same question in the previous quarter's survey, 84% of surveyed managers said defaults would rise.

Among the surveyed portfolio managers, 12% believe defaults will remain unchanged over the next 12 months, down from 16% in the previous quarter's survey, and 5% say they will go down, compared with none in the previous survey.

The survey's Aggregate Credit Default Outlook index for the next 12 months rose very slightly to -78.3 in the third-quarter survey from -82.3 in the previous quarter. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

Som-lok Leung, IACPM's executive director, said in a phone interview that managers' responses to the survey are certainly expected.

"I think it's not surprising to me at all," Mr. Leung said. "People have been looking at what's been happening to the whole economy, and the actions being taken by central banks, and it's starting to have its predictable effects."

By region, Europe's Aggregate Credit Default Outlook index remained the lowest among all regions due to its proximity to the crisis in Ukraine, at -88.6, barely above its rating of -91.2 the previous quarter.

North America's index rose to -78.9 from -88.9; Asia rose to -68.2 from -82.6; and Australia's index to -56.3 from -71.4.

Survey respondents also forecast wider credit spreads over the next three months. The second-quarter survey had seen the consensus for spreads plummet from the previous quarter, and while the level of pessimism steadied during the third quarter, managers still remained gloomy.

While the index for investment-grade fixed income in North America rose to -40.6 for the latest survey, up from -69 three months earlier, sentiment for investment-grade fixed income in Europe worsened, with the index lowering to -64.5 from -63.3.

The index reading for North American high-yield debt rose to -59.4 from -78.6 in the first quarter, while the index reading for European high-yield debt rose to -66.7 from -69.

The survey is conducted among IACPM members, who are credit portfolio managers at more than 100 financial institutions in the U.S., Europe, Asia, Africa and Australia.