Managers see increased credit defaults in next 12 months, survey finds

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Credit portfolio managers forecast rising credit defaults in the next 12 months and are split as to whether credit spreads will widen or remain the same over the next three months, said a third-quarter survey from the International Association of Credit Portfolio Managers.

In the survey, 58% of credit portfolio managers forecast that average corporate credit default rates will go up during the next 12 months, while 34% said they will remain unchanged and 8% said defaults will go down.

When asked whether North American credit spreads will widen or tighten over the next three months, only 8% of respondents said they expected spreads to tighten, but the result was split otherwise, with 47% believing spreads will not change and 44% believe spreads with widen.

Som-lok Leung, IACPM executive director, said in a telephone interview that portfolio managers are wary about central bank liquidity and the potential end to a record-long economic expansion. However, when that end will occur is unclear. 

"There's very little disagreement about things getting better," Mr. Leung said. "Things are kind of floating in this limbo stage or they're going to get worse, and that's where things are a little bit unclear. I think that's the interesting thing. ... I think everyone agree the cycle will turn (but) getting the timing right is not so easy and I think that's where the disagreement lies." 

The Credit Spread Outlook index for the next three months overall increased to -38.2 from -66 in the most recent survey, which was conducted in the beginning of October. The Aggregate Credit Default Outlook index for the next 12 months is -47.2, up from -51.1 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 North American corporate credit improved slightly. That region's Credit Default Outlook index rose to -43.2 from -65.5, with 57% of respondents saying credit defaults will go up in the next 12 months (compared to 66% in the previous survey) and 30% saying they will be unchanged (compared to 34% in the previous survey). Fourteen percent said defaults will go down in the next 12 months, while no one made that forecast in the second-quarter survey.

The survey is conducted among IACPM members, which consist of credit portfolio managers at more than 100 financial institutions in 20 countries.

BY ROB KOZLOWSKI - Pensions & Investments