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Credit Managers See Spreads Widening, Defaults Rising

Last update: 7/14/2008 10:36:30 AM

     DOW JONES NEWSWIRES   

Credit portfolio managers believe the next three months will see credit spreads widening and defaults continuing to rise, according to a new survey by the International Association of Credit Portfolio Managers.

In addition, a companion index "strongly suggests credit defaults will rise over the next 12 months."

The anticipation that spreads will widen is a break from prior predictions of near-term tightenings, which happened in the second quarter as those surveyed expected. Spreads, or risk premiums, began widening last month.

"Sentiment has clearly changed," said Som-lok Leung, the association's executive director. "Spreads tightened during the spring after widening significantly with the onset of the credit crisis. Now, once again, portfolio managers believe investors will demand wider spreads, partly because managers expect real risk to rise in the form of higher defaults."

The survey questioned credit portfolio managers at 87 leading banks and other financial institutions in 16 countries. Their readings were based on a scale of 100 to negative 100, with 100 showing positive growth, zero showing no change, and negative 100 showing high defaults and wide spreads. The survey for the end of June had an outlook of negative 69.1. A March survey was at 14.8.

Results were most pessimistic among corporate borrowers and individual consumers, as well as in real estate. The index scores for June were -78.6 for corporate borrowers, -79.5 for the consumer sector and -81.6 in real estate.

The association started conducting the quarterly survey last year, but decided with the latest survey to begin releasing the findings. Leung said doing so will allow investors to "benefit from the collective views of professional credit portfolio managers."

-By David Benoit, Dow Jones Newswires; 201-938-2472; david.benoit@dowjones.com

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