Fewer defaults likely in next year with tighter spreads: IACPM survey

By Susanna Moon

Chicago, April 19 - International Association of Credit Portfolio Managers said its Credit Outlook Survey turned sharply positive in the latest reading, with a forecast of easing default risk and tighter credit spreads.

The survey showed strong agreement that fewer loans will default over the next 12 months, especially among corporate and even retail credits, according to an IACPM release.

The survey was conducted among members of the IACPM at the beginning of April.

IACPM said its Aggregate Credit Default Outlook Index was 37.7 for the first quarter, the most positive result since the survey began at the end of December 2007.

"There is broad agreement among credit portfolio managers that the recovery is established and well underway," Som-lok Leung, executive director of the IACPM, said in a statement.

"For example, 68% of survey respondents expect corporate defaults to fall over the next year, while just 7% expect them to increase."

The IACPM Major Markets Credit Spread Outlook Index also continued to be positive in the first quarter at 38.8.

Concerns linger

Many survey respondents remain cautious, the association noted.

Almost half of respondents, or 47%, expect investment-grade spreads in North America to tighten over the next three months, and 43% of respondents expect them to remain unchanged.

Spreads have tightened rapidly over the past year, leading to concern that they tightened too much, too soon, the association said.

"The real question is whether the market has gotten ahead of itself in terms of pricing risk," Leung said.

"Our members strongly believe the risk of default has significantly declined, but there is considerable concern that the market has gone too far in anticipating recovery."

Respondents are concerned about the quick return of more lenient loan covenants and worry that market participants may be moving too quickly into riskier structures that have proved destructive, the survey noted.

It asked: Is the market overly jubilant, or is there too much liquidity in the system?

"Central banks pumped enormous amounts of money into the global markets to prevent the financial crisis from getting even worse," Leung noted. "But now there is concern about effect of that liquidity on asset prices and structures."

Survey data

Survey respondents are members of the IACPM, which consists of credit portfolio managers at more than 80 banks and financial institutions in 14 countries in the United States, Europe and Asia.

IACPM members were surveyed at the end of the first quarter.

The results are calculated as diffusion indexes, which show values ranging from 100 to negative 100, as well as no change, which is in the middle of the scale and is recorded as zero.

Positive numbers signify an expectation for improvement in credit conditions, specifically fewer defaults and narrower spreads. Negative numbers indicate an expectation for deterioration with higher defaults and wider spreads.

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