The Economy

Portfolio Managers Warming to European Corporate Credit

Institutional managers see fewer credit defaults and narrower spreads coming in Europe, but their outlook for North America worsens.
Vincent RyanApril 16, 2015
Portfolio Managers Warming to European Corporate Credit

European corporations are definitely benefiting from the European Central Bank’s quantitative easing program, at least in the world of credit. The view of the North American corporate credit market, on the other hand, shows signs of turning gloomy.

In a dramatic reversal, international portfolio managers now have a more positive outlook on corporate credits in Europe. Surveyed at the end of the first quarter, the members of the International Association of Credit Portfolio Managers largely expect European corporate credit spreads to stay where they are or narrow, and are projecting fewer credit defaults.

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euro goldenThe IACPM’s Credit Default Index for European corporate securities for the next 12 months improved from -31.4 to -10.0 in the latest survey, and the Credit Spread Outlook Index for European investment-grade debt for the next three months improved from -9.7 in December to 23.1.

“To be sure, the credit default outlook for European corporate debt remains modestly negative but is still considerably better than the reading taken in the last quarterly survey conducted at the end of last year,” the IACPM said in a press release. (Positive numbers signify an expectation for improved credit conditions, specifically fewer defaults and narrower spreads, while negative numbers indicate an expectation of deterioration with higher defaults and wider spreads.)

“The results are a bit surprising considering Europe still faces structural problems like Greece’s future in the European Union,” Som-lok Leung, executive director of the IACPM, said, “but, at the same time, the quantitative easing program recently launched by the European Central Bank is clearly helping expectations.”

North America, however, is a different story. The Credit Default Outlook Index for North American corporate debt worsened from -24.4 in December to -38.6 in March. “The region has enjoyed one of the healthiest economies in the developed world in recent years but now faces several headwinds,” the IACPM said.

“It’s important to remember that the North American economy has performed relatively well and defaults are at an extremely low level,” according to Leung, “so it’s not surprising that people think defaults will increase in the future. At the same time, though, survey respondents are specifically looking at the knock-on effect of lower oil prices and the expectation that the Fed will raise interest rates at some point this year.”

The Credit Spread Outlook Index for investment-grade North American debt in the next three months moved from 2.5 at the end of last year to -11.4, suggesting an expectation of stable or widening credit spreads.

In the much shorter term, however, the reverse has happened. Corporate credit spreads tightened across the board last week, said Morningstar corporate bond strategist David Sekera in an April 13 note, partly due to a dearth of new issues.

“As we enter earnings season, many corporations are in their quiet periods, leading to a dearth of new issue volume over the past two weeks. This has allowed the market to digest the voluminous amount of bonds priced in March,” Sekera wrote. Additionally, rising oil prices gave a boost to energy company bonds. “The energy sector has outperformed the rest of the corporate bond market universe this year and has tightened 66 basis points” since mid-January,” Sekera noted.

The IACPM is made up of credit managers that oversee the corporate securities portfolios at more than 100 global banks, insurance companies, and asset managers.