Moody's Liquidity-Stress Index (LSI) edged lower again in March, extending its overall improving trend, the rating agency says in its most recent edition of SGL Monitor. The index declined to 5.6% in mid-March from 5.7 in February. The decreasing LSI bodes well for a lower US speculative-grade default rate, which Moody's forecasts will fall to 3.1% by next February, from around 5.4% today.
Moody's Liquidity-Stress Index falls when corporate liquidity appears to improve and rises when it appears to weaken.
"The LSI has been steadily improving for a year now, except for a short-lived uptick in January," said Senior Vice President, John Puchalla. "Speculative-grade companies continue to benefit from generally solid fundamentals, including modest US economic growth and robust credit markets fueled by investor appetite for higher yields."
New high-yield bond and loan issuance in the year to date is at least twice as high as it was this time last year, Puchalla says in "LSI Stable Amid Robust Issuance." Bond issuance so far totals about $70 billion and loan issuance around $190 billion, according to Dealogic. February was a particularly busy month, with the momentum carrying into March.
While M&A activity has been modest, refinancing activity is heavy as issuers continue to capitalize on good market conditions to push out maturities at favorable pricing.
So far in March, there have been three upgrades and three downgrades of Moody's speculative-grade liquidity (SGL) ratings. Operating weakness contributed to the downgrades, but appear to reflect company-specific issues rather than any more broad-based industry shifts. The number of SGL rating downgrades remains far below the level of early 2016, when Moody's undertook a major ratings review of the energy sector.
Meanwhile, Moody's Covenant-Stress Index slipped to 3.6% in February from 3.9% the prior month, also resuming a steady decline after a brief uptick in January. The index measures the extent to which US speculative-grade companies are at risk of violating debt covenants, and continues to indicate that the risk of their doing so is very small.
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