Bloomberg News

European Debt Costs to Fall as Defaults Rise, IACPM Survey Says

January 17, 2013

High-yield debt will become cheaper in Europe in the next three months even as the outlook for corporate defaults in the region remains “sharply negative,” according to the International Association of Credit Portfolio Managers.

About 47 percent of IACPM members expect yield spreads on European speculative-grade debt will narrow, according to a survey conducted by the organization at the beginning of the year. Its 88 members include banks, insurance companies and money managers in 17 countries.

While sentiment relating to credit spreads in Europe was positive for the first time since June 2011, lenders remain concerned about the region’s three-year-old debt crisis, the survey shows. The 12-month outlook for European corporate defaults, though improved, remained the most negative of all areas of the world.

“There are still a lot of underlying problems that are still unsolved,” Som-lok Leung, the New York-based executive director of the IACPM, said in a telephone interview. “There are still some people who think that things will get worse.”

The survey shows that 18 percent see spreads on European high-yield debt widening in the next three months, while 35 percent say borrowing costs will be unchanged.

The global speculative-grade default rate will climb to 3 percent by the end of this year, from 2.6 percent at the end of December, remaining below the 4.8 percent average since 1983, according to Moody’s Investors Service.

European Defaults

“While European spreads are at a five-year low, we nevertheless expect a slight increase in defaults going forward,” said Albert Metz, a managing director of credit policy research at Moody’s, in a Jan. 9 statement from the ratings firm.

Europe’s default rate will rise to 3.3 percent by the end of this year, from 1.8 percent at the end of 2012, according to Moody’s. The company estimates that speculative-grade defaults in the U.S. will decline to 3 percent, from 3.2 percent at the end of December.

“The outlook for the U.S. is considerably more positive than it is for Europe but few are predicting a robust economic recovery,” the IACPM said.

A majority, or 57 percent, of its members see spreads narrowing on high-yield debt in North America in the next three months, the survey shows.

The rate on U.S. high-yield bonds was 495 basis points more than comparable Treasuries as of yesterday, while European junk- bond margins averaged 497 basis points on Jan. 15, Bank of America Merrill Lynch indexes show. A basis point is 0.01 percentage point.

Leveraged Loans

The cost of U.S. leveraged loans sold to non-bank lenders averaged 4.52 percentage points more than lending benchmarks at the end of last year, the lowest since 4.25 percentage points in September, according to Standard & Poor’s Capital IQ Leveraged Commentary & Data.

Leveraged-loans are a type of high-yield, or junk, debt rated below Baa3 by Moody’s and less than BBB-by S&P.

The spread on European loans with a single B rating averaged 4.91 percentage points in the second half of last year, down from 5.33 percentage points for loans sold to non-bank lenders in first six months of 2012, data from S&P Capital IQ LCD show.

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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