Credit investors expect defaults to rise; most anticipate US recession this year

CREDIT portfolio managers are forecasting a rise in corporate defaults in the coming year, and more than four out of five participants expect a chance of a US recession in 2023, a survey by the International Association of Credit Portfolio Managers (IACPM) showed. 

The survey showed that 81 per cent of fund managers anticipate defaults picking up in the next 12 months, compared with 80 per cent in last December’s survey. This comes as reduced bank liquidity and credit-risk concerns land on top of macroeconomic issues. For North American corporates, 86 per cent of respondents expect defaults to rise. The figure is slightly higher, at 91 per cent, for their European counterparts.

Leung Som-lok, IACPM’s executive director, wrote in a statement: “Our members have expected to see the impact of rising interest rates for some time, and we’re beginning to see more credit stress and defaults in corporate borrowers now.

“Unfortunately, this could take some time to work its way through the system.” 

A large majority of survey respondents – 84 per cent – expect a recession in the US to occur sometime this year. That is higher than the 61 per cent of participants who anticipate a recession this year in Europe and the UK. 

Credit spreads are expected to move higher, with almost 60 per cent of participants forecasting North American credit spreads widening over the next three months and 80 per cent of participants forecasting high-yield spreads rising.

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Respondents also foresee certain industries – such as healthcare, medium-sized tech companies and defence manufacturers – facing tough times in the current environment. Commercial real estate was also cited, given that work-from-home trends are lowering office occupancy rates and property owners are having to refinance in a higher interest rate environment. 

IACPM comprises more than 130 financial institutions across 30 countries. Its members include portfolio managers at commercial banks, investment banks and asset managers, according to its website. BLOOMBERG