Lower Liquidity Stress Index Reflects Strength in Credit Market

Moody’s Liquidity Stress Index lowered to 6.2% in the middle of November, down from 6.6% at the end of October. This is the seventh consecutive month the index, which falls when corporate liquidity appears to improve, showed improvement and indicates ongoing strength in the credit markets, according to the latest SGL Monitor report from Moody’s Investors Service.

“The LSI’s improving trajectory is the result of a confluence of factors, including healthy credit market access, which has helped speculative-grade companies enhance investment funding capacity and proactively manage their balance sheet needs, including refinancing upcoming maturities,” said Moody’s Senior Vice President John Puchalla. “The index has also benefited as the level of rating activity in the energy sector continues to moderate, following a large number of rating actions in late 2015 and early 2016.”

Speculative-grade companies may be benefitting from an environment of ongoing low interest rates, however, rather than improved fundamentals. Risks remain, Puchalla said.

Downgrades of speculative-grade liquidity ratings outnumbered upgrades by seven to three so far in November and were dispersed across industries. The ratings moves did not affect energy companies. The downgrades came about from operational and other issues specific to those companies.

Speculative-grade companies remain at low risk of violating their debt covenants, Moody’s said, as indicated by the rating agency’s Covenant Stress Index, which enjoyed a sixth straight monthly decline, landing at 4.3% in October from 4.4% in September.

– Adam Fusco, editorial associate

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