The wall of liquidity flowing from the US government’s US$1.9 trillion stimulus program has chased away fears of rising corporate credit defaults in North America and has stabilised credit portfolios, according to the International Association of Credit Portfolio Managers has released its quarterly Credit Outlook Survey.
In response, many financial institutions are upping their risk exposure and are actively looking for new credit assets for the first time since the global pandemic struck early last year. “The amount of liquidity is immense and credit portfolios are stabilising, creating pressure to put money to work,” said Som-lok Leung, executive director of the International Association of Credit Portfolio Managers. “People are hunting for ways to deploy their funds.”
For the first time since the fourth quarter in 2013, survey respondents, who manage corporate loan portfolios at more than 100 global banks, insurance companies and asset management firms, believe corporate defaults will fall in North America over the next 12 months.
The latest quarterly reading is 16.7, which means more survey re- respondents believe defaults will fall in the region than think they will rise. Similarly, respondents expect credit spreads to either tighten or stay the same in both North America and Europe. The overall index score is 13.2, which is the first positive reading since the first quarter in 2015. “Longer term, portfolio managers are certainly worried all the stimulus will lead to rising inflation and higher interest rates,” commented Leung. “But that reckoning is at least a year or two away and perhaps even longer.”
When the pandemic first hit a year ago, the IACPM Diffusion Index for retained portfolio risk fell to minus-38.1 in the first quarter 2020 survey, which meant on balance managers were reducing risk. The Index fell even further in the second quarter before recovering in the third and fourth quarters last year. The latest reading is 4.2, the first positive reading since the beginning of the crisis.
Credit portfolio managers now find themselves under intense pressure to find assets that provide a reasonable return because no one can afford to stay in cash equivalents. Markets have become extremely competitive and deal structures have loosened considerably.
“Make no mistake, given all the stimulus, there are deals out there but not enough good ones,” added Leung. “Everyone is looking for the same thing and deal structures reflect the imbalance between supply and demand.”
While the credit outlook has improved across the globe, there are differences between the US and the rest of the world, especially Europe. Respondents say they are particularly worried about high yield debt, noting there is no stimulus package in Europe and a third wave of the coronavirus is hitting the region. Longer-term, portfolio managers are certainly worried all the stimulus will lead to rising inflation and higher interest rates, but that reckoning is at least a year or two away and perhaps even longer.
“Many survey respondents point out there is far less concern over investment-grade debt,” Leung went on to say noting the relatively small difference in expectations for investment-grade credit spreads in Europe versus North America. “Respondents also point out interest rates remain low in Europe and bank performance is strong.”
The IACPM is an association of 125 financial institutions in 26 countries. Members include the world's largest commercial banks, investment banks and insurance companies.