Company Defaults to Rise

Survey shows debt investors expect corporate defaults to rise as Fed tapering winds down and interest rates rise globally.

Debt investors expect corporate defaults to increase during the next year as the Federal Reserve winds down stimulus measures and pushes interest rates higher, according an International Association of Credit Portfolio Managers (IACPM) survey.

The credit default outlook index, in which negative numbers indicate an expectation of higher defaults and deteriorating credit conditions, fell to -14.6 at the end of March from 4.5 in December, the group said in a statement today. IACPM’s 93 members include banks, insurance companies, and asset managers in 17 countries.

The investors said interest rates that economists project will rise during the next five quarters will drive up funding costs and make it more expensive for companies to refinance debt, according to Som-lok Leung, IACPM’s executive director. While that raises the risk of losses, the money managers are predicting demand for fixed-income assets will remain strong enough through June to reduce the extra yield investors demand to own the debt instead of Treasuries, he said.

“There’s an expectation of increased interest rates, especially in the U.S., and everyone knows that it’s coming but we don’t know exactly the timing,” Leung, based in New York, said in a telephone interview. The default and spread outlooks “have different time frames attached to them,” he said.

The IACPM credit spread outlook index increased to 14.6 from 1.8 at year-end, indicating an expected narrowing in relative yields. European investment-grade corporates in particular are expected to see a “pronounced” decline in credit spreads, according to an IACPM statement.

The trailing 12-month global speculative-grade corporate default rate was 2.9 percent at the end of 2013, according to a March 3 report from Moody’s Investors Service. The ratings firm forecasts the measure will end this year at 2.2 percent, below the long-term average of 4.7 percent since 1983.

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