Bloomberg News

Defaults Seen Rising as Europe Sours Corporate Debt, Survey Says

October 20, 2011

Oct. 20 (Bloomberg) -- The outlook for corporate credit turned negative for the first time since September 2009, as banks forecast defaults will rise over the next year amid concern over Europe’s sovereign debt crisis, according to the International Association of Credit Portfolio Managers.

Almost half, or 47 percent, of financial institutions surveyed by IACPM earlier this month predicted an increase in corporate defaults over the next 12 months. It’s the first negative outlook since the group’s quarterly survey in September 2009, and the worst since June of that year.

Portfolio managers are focused on risks tied to the European debt crisis and spillover effects on the U.S. economy, according to the association, whose 92 members include banks and other financial institutions globally. German Chancellor Angela Merkel said earlier this week that the European Union summit scheduled for Oct. 23 will mark an “important step,” though not the final one, in solving the region’s crisis as leaders consider ways to strengthen their bailout effort.

“If the European sovereign debt problem is not solved, things could get very, very bad very quickly,” Som-lok Leung, executive director of New York-based IACPM, said in a telephone interview. “It would likely be worse than Lehman three years ago.”

Lehman Brothers Holdings Inc. failed in September 2008, and the U.S. fell deeper into the worst recession since the Great Depression. Gross domestic product is expected to grow 1.7 percent this year, according to the median estimates of economists surveyed by Bloomberg.

‘Downward Spiral’

“We have a very global economy -- it’s hard to imagine if Europe starts on a downward spiral that it wouldn’t have a negative impact on firms in the U.S.,” said Leung.

Moody’s Investors Service expects the global speculative- grade default rate will rise to 2.1 percent by the third quarter of next year, from a trailing 12-month rate of 1.8 percent at the end of September.

Speculative-grade, or high-yield, debt is ranked below Baa3 by Moody’s and less than BBB- by Standard & Poor’s.

Almost half, or 48 percent, of financial institutions surveyed by IACPM said they expected high-yield credit spreads in North America to widen over the next three months. The outlook on spreads is the worst since June 2010, the month that Greece’s credit rating was lowered to junk by Moody’s.

“There’s still a lot of uncertainty,” in Europe, Leung said. “You don’t see a very clear course of action there and that’s what our members are focusing on.”

--Editors: Chapin Wright, Faris Khan

To contact the reporter on this story: Christine Idzelis in New York at cidzelis@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net


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