Institutional fixed-income investors have grown less confident about U.S. credit market conditions over the past six months, according to a new survey by Fitch Ratings.

Survey respondents cited weak overall economic activity, higher corporate leverage, and shareholder-friendly activities as their top concerns.

Economic weakness jumped to first among macroeconomic factors cited as being a high risk to U.S. credit markets, a reversal from its last-place showing in the June 2006 survey, Fitch found. Against the backdrop of weaker economic fundamentals, institutional investors are expecting no let-up in the trend toward higher corporate leverage, it said. In fact, 88% of respondents to the December survey anticipate corporate leverage will increase over the next 12 months, up from 77% in June.

Concerns about shareholder-friendly activities, including leveraged buyouts and mergers and acquisitions, also increased, the rating agency found. A full 59% of respondents ranked shareholder-friendly activity as a high-risk concern, well above the 31% garnered by the next nearest risk factor. In addition, 83% of respondents expect higher default rates over the next 12 months, up from 60% in the previous survey.

“Insight into investor views is critical in assessing credit availability. The results of this new survey offer a fresh look at evolving investor sentiment at a particularly important point in time when the credit cycle is expected to enter a more mature and less benign phase” said Mariarosa Verde, managing director, Fitch Credit Market Research.

Investor outlooks were not uniform across asset classes and sectors, Fitch noted. Respondents were significantly more concerned with credit conditions in the asset-backed market, with 62% expecting some deterioration, up from 45% in the June 2006 survey. Investors were substantially less negative, however, on the emerging markets, with 55% expecting some deterioration, compared with 81% in June.

The survey also revealed mixed sector views. Respondents’ outlooks were most negative across the Consumer Cyclical and Manufacturing sectors. On the opposite end of the spectrum, investor opinions were most constructive on traditionally defensive sectors, including Energy and Health Care.

“While opinions differed across broad industries, we would characterize the results overall as skewed to the negative, with investors expecting more deterioration than meaningful improvement across the majority of sectors examined,” said James Batterman, senior director, Fitch Credit Policy Group.

By a sizable margin, aggressive use of proceeds was ranked as the biggest risk facing the leveraged loan market, Fitch reported. “Investors also expressed worries about the shift to more loan-heavy capital structures. As speculative grade borrowers increasingly tap the leveraged loan market for funds and eschew high-yield bond issuance, concerns about the inevitable shift to more loan-heavy capital structures was cited as the second most relevant risk factor facing the loan market this year,” it said.

Investors also expressed increased concern over weak covenant protections. “Investor unease about inadequate covenant protection is evidenced by the fact that, for most asset classes, the proportion of respondents listing covenant protection as less than adequate rose,” said William May, senior director, Fitch Credit Market Research.

The survey was conducted in December 2006 by Fitch Ratings together with the Institutional Investor Fixed Income Forum, a private group of prominent fixed income executives. It includes responses from 59 senior investors at traditional asset management firms, insurance companies, pension funds, hedge funds and banks. Firm-wide fixed income assets under management ranged from less than US$20 billion to portfolios in excess of US$100 billion. This survey is conducted semi-annually.