The Economy

Loan Managers See Rising Defaults in Next Year

While respondents to a quarterly survey continue to be concerned about defaults, the outlook for credit spreads is decidedly mixed.
Matthew HellerOctober 22, 2015
Loan Managers See Rising Defaults in Next Year

Credit portfolio managers are continuing to forecast rising global defaults over the next 12 months amid uncertainty over the impact of possible interest-rate hikes, according to a new survey.

The International Association of Credit Portfolio Managers (IACPM) said in its latest quarterly Credit Outlook Survey that its Credit Default Outlook Index is -31.4, relatively unchanged from last quarter’s negative -34.6.

A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

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“The threat of rising defaults has been with us for some time,” Som-lok Leung, the executive director of the IACPM, said in a news release. “Recently, we’ve seen a greater number of downgrades from the rating agencies and some transactions have been affected but, all things considered, not that many, nor has liquidity dried up in any meaningful way.”

“The real question is what happens when interest rates rise,” he added. “How extensive will be the impact?”

According to the survey, the outlook for credit spreads over the next three months is decidedly mixed. The Aggregate Credit Spread Outlook Index is -7.0, which is considerably closer to neutral than last quarter’s reading of -45.2, which meant at that time significantly more respondents believed spreads would widen rather than tighten.

“It’s possible we’re reaching an inflection point,” Leung said. “Respondents aren’t so much worried about a downturn as much as they think economic expansion will slow down. Credits on the fringe, such as high-yield energy companies, could be in for a rough patch, while other credits, such as investment-grade debt, may not be as impacted.”

The IACPM polls managers of corporate loan portfolios at more than 100 global banks, insurance companies, and asset management firms.