Moody's: Liquidity-Stress Indicator enters 2018 in record-low territory, but with less room for gains

Moody's Liquidity-Stress Indicator (LSI) slipped to 2.4% as of mid-January from 2.5% at the end of 2017, when it set a new low for month-end readings, the rating agency says in its most recent edition of SGL Monitor. Liquidity fundamentals remain robust, with the US economy expected to pick up this year and companies expected to continue capitalizing on strong credit markets to meet their financing needs.

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

"After a slow start, issuance has picked up in mid-late January as investors continue their search for yield in a still-low interest rate environment," said John Puchalla, a Moody's Senior Vice President. "However, we see far less scope in 2018 for the significant gains the LSI made last year, given that commodity companies are now on much firmer footing and interest rate rises are likely to dampen refinancing activity, alongside the squeeze some low-rated borrowers will feel from the loss of interest deductibility."

Improvements in commodity sector liquidity have contributed to a drop in the default rate among companies with the lowest speculative-grade liquidity (SGL) rating, SGL-4, Puchalla says. The default rate among this cohort hit a three-year low of 35.8% in 2017, compared with 55% in 2016 and 54.3% in 2015. Overall, Moody's forecasts that the US speculative-grade default rate will fall to 2.4% in December this year, from 3.3% at the end of 2017.

Meanwhile, Moody's Covenant-Stress Indicator eased to 2.2% in December from 2.3% in November, pushing further below its long-term average of 5.8% and signaling that few speculative-grade issuers are at risk of violating their financial maintenance covenants.

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