Credit portfolio managers at banks, insurance companies and investment funds around the world have grown increasingly concerned about a rise in corporate defaults amid uncertainty surrounding the financial health of peripheral countries and banks in Europe, a new survey has shown.
Some 66 per cent of the surveyed members of the International Association of Credit Portfolio Managers (IACPM), an organisation of managers at 92 institutions in 17 countries, said that they expected an increase in corporate defaults in Europe over the next year. Respondents were largely split over the direction of default rates in the US, with 47 per cent bracing for an uptick and 41 per cent expecting that default rates would be static.
Default expectations were generally the most negative that they have been since June 2009, said Som-lok Leung, executive director of IACPM, whose members include large banks like Bank of America and Commerzbank, MetLife and other insurance companies and funds such as BlueMountain Capital.
“The lack of clarity over the European sovereign debt crisis is causing a ripple effect over corporates,” Mr Leung said. “If [Europe] does not get fixed, the effects could be pretty dramatic. When you manage a credit portfolio, you are managing that long tail of downside risk.”
Banks and investors manage that risk mostly by hedging with derivatives, selling loans or other securities, holding smaller amounts of risky investments or demanding higher interest rates, Mr Leung said.
Spreads, or risk premiums, on corporate debt have risen during the past few months as problems mounted in Europe and the outlook on the US economy soured.
Asia, however, is seen as insulated from Europe’s problems. Only 29 per cent of respondents expected corporate defaults to rise in Asia, while 54 per cent expected them to be stable.
The trailing 12-month global speculative default rate finished the third quarter at 1.8 per cent, down from 2.3 per cent in the second quarter, according to Moody’s Investors Service. In the US, the default rate was 2 per cent and it was 1.4 per cent in Europe, both below historical averages. Moody’s does not calculate corporate default rates for Asia.
In a sign of potential stress, Moody’s speculative-grade distressed index, which measures the percentage of issuers with ratings below investment grade whose debt trades at risk premiums of more than 10 percentage points above the benchmark, surged to nearly 25 per cent in the third quarter from 9.5 per cent in the second quarter.
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