Moody's Liquidity-Stress Indicator slips past record low in mid-November

Moody's Liquidity-Stress Indicator (LSI) continued to decline in the first two weeks of November, slipping past the record low of 2.7% set in October 2017, the rating agency says in its most recent edition of SGL Monitor. The indicator came in at 2.6% as of mid-November, indicating that speculative-grade companies continue to have solid liquidity aided by ready access to the credit markets, with investors hungry for yield keeping the taps flowing.

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

"Speculative-grade liquidity continues to improve due to strong credit markets, the recovery in oil and gas, and a growing US economy that is bolstering corporate earnings and cash flow," said Moody's Senior Vice President John Puchalla. "The declining LSI presages a lower US speculative-grade default rate, which we forecast will fall to 2.1% in October 2018 from 3.2% today."

Refinancing are spurring upgrades of Moody's speculative-grade liquidity (SGL) ratings, Puchalla says in "LSI lowers bar on liquidity risks and defaults." So far in November there have five SGL rating upgrades and three downgrades. The upgrades included two energy companies, California Resources Corp. and Pioneer Energy Services, which have both recently completed refinancing. Conversely, among the downgrades was beleaguered department store chain Sears Holdings Corp., which was downgraded to SGL-4 due to weak sales, negative operating cash flow and meaningful 2018 maturities.

Meanwhile, Moody's Covenant-Stress Indicator slipped to 2.3% in October from 2.4% in September, its lowest level since April 2015 and a sign that companies face fairly negligible risk of violating their financial maintenance covenants. Economic growth and the prevalence of covenant-lite loan structures is limiting the risk of covenant violations.

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