Moody's: Liquidity-Stress Indicator remains near its historic low in early 2018 despite mixed movements

Movements in Moody's Liquidity-Stress Indicator (LSI) are mixed in the early part of 2018 but spec-grade liquidity remains strong, the rating agency says in its most recent edition of SGL Monitor. The LSI increased modestly to 2.7% in January from a record low 2.5% at the end of 2017, followed by a slight dip to 2.6% in mid-February. With the gradual tightening of monetary policy, higher interest rates and limitations on interest deductibility in the new tax laws, as well as less room for improvement in commodity sector liquidity, analysts expect the LSI to be flat to slightly higher in 2018. Even so, liquidity strains and default risks overall are expected to remain low this year.

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

"Recent equity volatility is a reminder not to be complacent about risk," said John Puchalla, a Moody's Senior Vice President. "Nevertheless, corporate credit markets remain healthy, and while loan and bond issuance is lower than last year, companies are retaining good market access."

The SGL-4 default rate inched higher to 36.6% in January 2018 from 35.1% at the end of 2017, hovering above its 32.1% long-term average rate, even while remaining significantly lower than 2016's 55% rate. Defaults remain concentrated in companies where sector strains or a weak balance sheet make repairing a stressed liquidity position harder even with a growing economy, Puchalla says. Overall, Moody's forecasts that the one-year US speculative-grade default rate will fall to 2.0% in January 2019 from 3.2% in January 2018.

Meanwhile, Moody's Covenant-Stress Indicator edged up to 2.3% in January 2018 from 2.2% in December, but remains below the 5.5% long-term average, helped by the widespread prevalence of cov-lite structures and signaling that few speculative-grade issuers are at risk of violating their financial maintenance covenants.

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