Moody’s Liquidity-Stress Index (LSI) fell for a ninth straight month as it declined to 5.9% in December from 6% the month prior, according to the rating agency’s recent SGL Monitor Flash. This bodes well for a benign default environment in 2017, Moody’s said, though it represents a contrarian view on the insolvency outlook when compared with reports from other sources. A fall in the index occurs when corporate liquidity appears to improve and rises when it appears to weaken.
“The LSI enters 2017 on a much calmer tone than it began 2016, with the energy sector strains that drove liquidity weakness and pushed up defaults now moderating,” said Moody’s Senior Vice President John Puchalla. “Meanwhile, a steady stream of new speculative-grade issuance continues to provide lower-rated companies with liquidity support, while generally positive economic sentiment should help them maintain healthy cash flows.”
Moody’s cited company-specific and transaction-related issues as the reason that downgrades exceeded upgrades in its speculative-grade liquidity (SGL) ratings and predicted that SGL rating volatility will lessen this year as the energy sector stabilizes.
Combined speculative-grade loan and bond issuance increased about 20% in 2016 as investors continued to hunt for yield in an environment of low interest rates. The chance of higher interest rates in 2017 could create challenges for companies with weak operating performance and low ratings, but such challenges won’t be of the same magnitude as energy companies faced in 2016, Moody’s said.
– Adam Fusco, editorial associate