Moody's Liquidity-Stress Index set to decline again in May; markets remain favorable to US spec-grade companies

Moody's Liquidity-Stress Index (LSI) declined again through mid-May, extending its improving trend to just over a year, the rating agency says in its most recent edition of SGL Monitor. The index dipped to 4.6% in mid-May from 4.9% in April as US speculative-grade company liquidity positions continue to be bolstered by earnings and good access to credit markets.

Moody's Liquidity-Stress Index falls when corporate liquidity appears to improve and rises when it appears to weaken.

"The LSI is benefiting from fundamental strengths, including steady-to-growing corporate earnings and strong investor appetite for yield," said Senior Vice President John Puchalla. "Importantly, despite new issue volume easing in April from the first quarter's blistering pace, new issuance continues at a healthy overall clip."

Thus far in May, upgrades of Moody's speculative-grade liquidity (SGL) ratings outpaced downgrades by six to one, Puchalla says. SGL rating activity reflects easing volatility, mainly as energy-related woes continue to ebb. With oil prices and production increasing, the fortunes of companies that supply the industry are also rebounding, including those of frack sand suppliers Fairmount Santrol and Hi-Crush Partners, which both saw their liquidity ratings upgraded to SGL-3 from SGL-4 in May.

Meanwhile, Moody's Covenant-Stress Index slipped to 3.2% in April from 3.5% in March. The index, which has been below its 5.8% long-term average since June last year, indicates that US speculative-grade companies continue to run a very low risk of violating their debt covenants.

Moody's forecasts that the US speculative-grade default rate will decline to 3.0% in April 2018 from 4.5% today, against a long-term average of 6.8%.

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