IACPM: Credit managers continue to expect defaults to rise in next 12 months

Credit portfolio managers remain pessimistic, projecting credit defaults to rise in all regions over the next 12 months, according to the fourth-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, 80% said defaults will increase during the upcoming period. It is the third straight quarter that at least 80% of managers have projected rising defaults over the upcoming 12 months.

In the third-quarter survey, 83% said they expected defaults to rise in the 12 months ending Sept. 30, 2023, and in the second-quarter survey, 84% of managers said defaults would rise in the 12 months ending June 30, 2023.

Despite the pessimism of the trailing six months, corporate defaults have not increased significantly, said Som-lok Leung, IACPM's executive director, in a phone interview.

"It's interesting that it (rising defaults) hasn't yet materialized," Mr. Leung said. He cited the traditional lag between the beginning of an economic slowdown and actual corporate defaults.

Also, he noted corporations are fairly well funded and have a lot of liquidity.

"They've been in a very good place," Mr. Leung said, "Corporate defaults have been very, very low for many, many years, without that being a core issue for institutions for quite some time, but I think the expectation is that will change."

The survey's Aggregate Credit Default Outlook index for the next 12 months rose very slightly to -75.5 in the fourth-quarter survey from -78.3 in the previous quarter. A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

By region, Europe's Aggregate Credit Default Outlook index was one of the two lowest among all regions due to its proximity to the crisis in Ukraine, at -84.4, just above its rating of -88.6 the previous quarter. North America's index fell to -84.4 from -78.9%; Australia's index fell to -64.7 from -56.3 and Asia rose to -59.1 from -68.2.

Survey respondents also forecast wider credit spreads over the next three months.

While the index for investment-grade fixed income in Europe rose to -41.4 from -64.5% three months earlier, sentiment for investment-grade fixed income in North America worsened, with the index lowering to -51.7 from -40.6.

The index reading for North American high-yield debt fell to -66.7 from -59.4 in the third quarter, while the index reading for European high-yield debt rose to -51.9 from -66.7.

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.