Corporate Defaults to Fall as Global Economy Firms, IACPM Says

Corporate defaults are expected to decrease as the global economy gathers pace, according to a survey by the International Association of Credit Portfolio Managers.

The credit default outlook index, in which positive numbers indicate an expectation of fewer defaults and improved credit conditions during the next 12 months, rose to 4.5 from negative 6.9 in September and minus 35.6 last June, according to the survey, which was released today and conducted during the first week of January. IACPM’s 89 members include banks, insurance companies and asset managers in 17 countries.

Respondents forecast better conditions in Europe, Asia, North America and Australia, according to the IACPM. The Washington-based World Bank forecasts the global economy will expand 3.2 percent this year, compared with a June projection of 3 percent and up from 2.4 percent in 2013.

“If you look at the bank earnings releases in the last week or so, a lot of them cite that credit quality is improving,” Som-lok Leung, the New York-based executive director of the IACPM, said in a telephone interview yesterday. “The World Bank just released its outlook for the world economy and that’s generally very positive.”

Speculative Grade

The trailing 12-month global speculative-grade corporate default rate was 2.6 percent in the last quarter of 2013, down from 3 percent in the prior quarter, according to a Jan. 9 report from Moody’s Investors Service. The ratings firm forecasts the measure will end this year at 2.3 percent.

The outlook for investment-grade debt in North America jumped to zero from negative 23.4 in September and to 9.5 from minus 30.4 for high-yield debt, according to the survey. The forecast for credit spreads over the next three months is “essentially neutral”, with almost half of survey respondents expecting spreads to be little changed during that period, according to the IACPM.

The credit spread outlook index for investment-grade European debt decreased to negative 5.1 from 11.1 in September, according to the report. The outlook for speculative-grade European debt rose to 2.6 from zero in September.

High-yield, high-risk, or junk, debt is graded below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

“The results for Europe investment-grade debt probably reflect differences between northern and southern Europe with the north generally doing better and the south still working through its structural issues,” Leung said in the report. “In North America, the markets seem to have achieved a bit of a balance in the face of better economic results and the Fed’s recent action on its quantitative easing program.”

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