NEW YORK, Jan 17 (LPC) - Corporations globally will increasingly default on debt as economies slow while borrowing costs and political strife escalate, according to a quarterly survey by the International Association of Credit Portfolio Managers.
The group’s credit default index sank in the fourth quarter to the most negative reading in more than nine years, worsening sharply from the prior quarter and indicating a broad-based call for rising debt defaults over the next 12 months.
“We’re very late in a long economic growth cycle and we’re finally beginning to see the impact of US Federal Reserve rate hikes, along with a bite from trade tariffs,” Som-lok Leung, IACPM’s executive director, said in a release.
Higher rates pose a particular threat to highly indebted companies needing to access capital markets as borrowing becomes more expensive.
The Fed’s December 2018 quarter percentage point rate hike was its ninth since December 2015.
The ongoing US government shutdown could also impact the credit outlook, Leung said, adding “the overwhelming majority of survey respondents clearly expect deteriorating conditions over the coming year.”
IACPM’s 12-month credit default outlook index tumbled to minus 71.1 in the fourth quarter from minus 47.2 in the third quarter of last year. The year ended with the most negative index reading since minus 72.3 in the second quarter of 2009.
Not a single manager surveyed expects fewer defaults in Europe, Asia or Australia, and only 3% see declining defaults in North America, the latest survey found.
US signs of an economic slowdown include corporate profit warnings and slowing manufacturing activity. This year started with a rare profit warning from Apple Inc and reports showing weakening US manufacturing.
Trade tariffs are encouraging some companies to consider moving out of China to other countries in Asia, elevating concerns about debt defaults in China, particularly for mid-sized companies.
The UK economy is starting to soften before the Brexit deadline at the end of March, while the yellow vest anti-government movement appears to be having a chilling effect on the French economy, the group said.
IACPM is an association of more than 100 financial institutions in 20 countries. (Reporting by Lynn Adler Editing by Jon Methven)