NEW YORK(Reuters) - Corporate debt defaults and credit spreads will increase globally, with particular concern about the beleaguered retail sector’s spillover effect on North American commercial real estate, according to an International Association of Credit Portfolio Managers (IACPM) quarterly survey.
Nearly two-thirds of the managers polled see commercial real estate defaults escalating in North America over the next 12 months, with a related index slumping to a negative 60 reading in the second quarter from negative 27 in the prior quarter.
“As brick and mortar stores close, shopping malls are impacted and any associated debt is more vulnerable,” Som-lok Leung, IACPM’s executive director, said in a statement.
The overall credit outlook was less pessimistic in Europe than in North America, where pro-business policies promised by the Trump administration have yet to gain traction.
IACPM’s 12-month Credit Default Outlook Index eroded to negative 38 in the second quarter from negative 31.3 the prior quarter, as a deteriorating view for North American debt overshadowed an improved view for Europe and Asia.
Negative numbers, which remain across regions in this index, indicate expected credit erosion with higher defaults and wider spreads.
The group’s 3-month Credit Spread Outlook Index improved to a negative 16.4 reading in the second quarter from negative 21.8 in the first quarter, based on expectations of steady debt spreads in Europe helping to offset widening in North America.
The latest quarterly survey was conducted before the second failed attempt, in mid-July, by a Republican-led US Senate to repeal and replace Obamacare. Trump’s domestic push for other policy overhauls including tax reform is seen being set back as a result of a lack of progress on new healthcare legislation.
“The credit outlook in Europe is somewhat brighter, although it is important to remember Europe is at an earlier stage in the economic cycle than North America,” Leung said.
“The UK economy has stayed on track since last year’s Brexit vote with strong employment and rising housing prices,” he said, also noting “an uptick in economic activity on continental Europe.”
Global default rates are low broadly, so there is little expectation of further declines.
Just 3% of the managers expect credit defaults to decrease in North America over the next 12 months, while the average expectation for lower corporate defaults globally is 7%, the survey found.
IACPM is an association of more than 90 financial institutions located in 21 countries.
Reporting by Lynn Adler; Editing By Jon Methven