IACPM survey finds lessened expectations for further credit defaults

By Angela McDaniels

Tacoma, Wash., Oct. 15 - Expectations for further credit defaults and widening credit spreads fell sharply in the International Association of Credit Portfolio Managers' latest Credit Outlook Survey, according to an IACPM news release.

The IACPM said that overall, survey respondents still believe defaults will rise over the next 12 months, but there is far less consensus than previous surveys. Using the IACPM Credit Outlook's diffusion index measure, respondents forecast defaults to rise with a score of minus 15.3, compared with minus 72.3 in the last quarterly survey.

Survey results are calculated as diffusion indexes, showing positive and negative values from positive 100 to negative 100. Positive values signify an expectation for improving conditions, such as tighter spreads or fewer defaults, and negative values indicate an expectation of deteriorating conditions.

In the latest survey, conducted at the end of the third quarter, respondents also continued to expect credit spreads to widen over the next three months but with less certainty than they did at the beginning of July, the association said. In the latest reading, respondents called for widening spreads with an aggregate index measure of minus 12.0 versus minus 43.5 in the previous reading.

"Compared to the beginning of the year, survey respondents are far less concerned about widespread defaults or systemic collapse," Som-lok Leung, IACPM executive director, said in the release.

"A preponderance of survey respondents are still concerned about rising defaults and further believe spreads will widen, but the focus seems to be limited to single credits now, rather than entire sectors or the whole system."

Defaults seen on the rise

The IACPM found it particularly striking that in the latest survey, respondents barely forecast higher defaults for corporate credits over the next 12 months, giving it a score of minus 2.8 with almost as many people predicting fewer defaults as those expecting a larger number.

This is the first time the measure has been this close to positive territory since the IACPM began conducting its survey in the fourth quarter of 2007, according to the release.

"There is certainly still some default risk in the market, but several respondents note a number of really big issues have been resolved," Leung said.

"For example, the auto industry has already seen a number of bankruptcies and is well into the restructuring process. Now, instead of worrying about entire sectors defaulting, many people are focusing on single names."

Several respondents cautioned that some sectors do remain vulnerable, the association noted. IACPM said rising unemployment and a cutback in consumer spending could lead to problems in the retail sector, and there is still significant concern about real estate. Survey respondents forecast rising retail and consumer defaults by scores of minus 17.9 and minus 25.9, respectively.

About 37% of survey respondents believe corporate credit defaults will increase, 36% believe they will decrease and 27% believe they will remain unchanged.

For the retail/consumer sector, 44% of respondents believe defaults will increase, 28% believe they will decrease and 28% believe they will stay the same. For real estate, the percentages are 48%, 23% and 29%, respectively.

Spreads expected to widen

Similarly, results in the latest survey indicate respondents have adjusted their views on credit spreads as the global financial markets have pulled back from the crisis levels of last fall, the association said. Respondents forecast both investment-grade and high-yield spreads in the United States to widen but with lowest negative values since last December. The IACPM's Credit Outlook Survey was minus 11.1 for investment-grade debt and minus 7.0 for high-yield debt.

Of the survey respondents, 42% believe the CDX North American Investment Grade 5Y index will widen from its Sept. 29 level, 27% believe it will remain unchanged and 31% believe it will narrow.

For the CDX North American High Yield 5Y index, 44% believe it will widen, 19% believe it will remain unchanged and 37% believe it will narrow.

"The panic factor seems to have come out of the market, and now we are closer to more traditional levels," Leung said.

IACPM said respondents are somewhat more concerned about spreads in Europe. The index scores in this part of the survey were minus 15.0 for European investment-grade debt and minus 15.4 for high-yield debt.

Of the survey respondents, 43% believe the iTraxx Europe 5Y index will widen from its Sept. 29 level, 30% believe it will remain unchanged and 28% believe it will narrow.

For the iTraxx Europe Crossover 5Y index, 49% believe it will widen, 18% believe it will remain unchanged and 33% believe it will narrow.

The IACPM is a professional association with a focus on credit portfolio management. It conducts its quarterly survey among 80 member firms located in 14 countries in Europe, North America, Asia, Australia and Africa. Membership includes credit portfolio managers at commercial and investment banks, insurance companies and asset managers.

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