Moody's: Rising Liquidity Stress Index indicates more defaults to come in 2016

Moody's Investors Service Liquidity Stress Index (LSI) jumped to 6.8% at the end of December 2015 from 6.4% in November, reaching the index's highest level since February 2010 and just slightly above its long-term average of 6.7%, forewarning of a rise in the default rate in 2016, the rating agency says in its most recent edition of SGL Monitor Flash.

The LSI for oil and gas increased to 19.6% in December from 19.3% in November as low oil prices continued to weaken liquidity and raise default risk. Among the four exploration and production companies downgraded to SGL-4, the weakest liquidity category, were Atlas Energy Holdings (Caa1 negative), California Resources Corp. (Caa1 negative) and Ultra Petroleum Corp. (Caa1 negative).

Liquidity weakness is also starting to spread to select lower-rated issuers in other sectors, though not broadly. The non-oil and gas LSI rose to 3.6% in December from 3.0% in the prior month.

The ratio of all SGL liquidity downgrades to upgrades was 1.74 for 2015, with 141 downgrades to 81 upgrades -- the highest since 2008 when the ratio was a record 2.96. Energy has been the key driver of liquidity downgrades, followed by metals and mining, amid weakening commodities demand in major developing countries such as China.

"Nevertheless, speculative-grade liquidity is much better than it was during the depths of the last recession, and should be supported this year by moderate economic growth and modest maturities for the market overall," said John Puchalla, a Moody's Senior Vice President.

Moody's forecasts the US speculative-grade default rate will climb to 4.1% in November this year from 3.0% in November 2015.

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