Corporate Liquidity for Speculative-Grade Firms in Better Shape During First Half of October

Corporate liquidity for U.S. speculative-grade companies as tracked by Moody’s Investors Service’s Liquidity-Stress Index (LSI) improved by mid-October from the end of September, benefitting in part from reduced volatility in the energy sector.

The LSI decreased to 6.8% from 7.1%, extending the index’s six-month decline from a recent peak of 10.3% in March, and matches its long-term average, Moody’s analysts said.

"The LSI is now sitting exactly at its long-term average, indicating that the liquidity pressures that fueled so much volatility in the energy sector are moderating," said John Puchalla, senior vice president at the ratings agency. "Even so, liquidity risks remain elevated among energy companies, with cash flows mismatching debt load at many firms that were largely capitalized before the oil price slump."

Also, U.S. speculative-grade firms are being aided by a favorable primary market to meet their liquidity needs. Meanwhile, “Investors' quest for yield rather than a meaningful improvement in corporate fundamentals is aiding market access, suggesting that liquidity could be vulnerable to sudden shifts in investor sentiment,” Puchalla said.

In the first half of October, Moody’s made no speculative-grade liquidity rating downgrades. It did make three upgrades, as upgrades are now close to overtaking downgrades for the fifth consecutive month, with companies benefitting from refinancing and liquidity gains that accompany distressed exchanges and asset sales, the ratings firm said.

Also of note, Moody’s Covenant Stress Index, which measures the extent to which speculative-grade companies are at risk of violating debt covenants, improved to 4.4% in September from 5.0% in August, carrying on a decrease from April’s peak of 7%, analysts said. Moody’s dropped five companies from the list of those firms with the weakest covenant quality score, and none were added to the list.

– Nicholas Stern, editorial associate

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