Moody's Liquidity Stress Index eases as liquidity support remains intact

Moody's Liquidity Stress Index (LSI) for US speculative-grade companies reached a one-year high in March, with a sharp rise in the oil and gas component due to falling oil prices pushing the overall LSI up modestly since mid-2014, the rating agency says in its latest edition of SGL Monitor. The LSI, which declines when liquidity improves, stood at 4.3% in March including a sector Oil & Gas LSI of 9.8% that was more than double its 4.4% level at the end of 2014.

Excluding energy-related pressures, however, the index reflects speculative-grade companies' still healthy liquidity as they continue to benefit from an improving US economy and ready access to the credit markets.

"The composite LSI has risen on the heels of a sharply higher energy LSI, but even weakly rated companies are able to tap new capital to bolster liquidity. This is keeping defaults low," says Senior Vice President, John Puchalla. "The economy is slowly picking up, while spec-grade issuers today have relatively robust cash flows and the credit markets remain open for business as investors continue their search for yield in a low interest rate environment."

Liquidity rating downgrades continue to outpace upgrades, with seven downgrades to five upgrades so far in April, Puchalla says. The downward moves were due to a mix of factors including upcoming maturities, weak revenue and cash flow trends, or potential covenant breaches, but these issues are not widespread.

Moody's new sector heat map shows that oil and gas companies account for half of the companies with the lowest liquidity rating of SGL-4. Sabine Oil & Gas Corp. and Hercules Offshore, Inc. were both downgraded to SGL-4 last month, while Swift Energy Company has followed suit in April.

But while weakening in the speculative-grade energy sector is the single biggest reason for the rise in the LSI since 2014, oil and gas companies have entered the current down-cycle with better liquidity than they had before the last downturn, according to Moody's recent report "Oil and Gas Companies' Liquidity Will Stay Firm Longer Than in 2008-2009."

Moody's Covenant Stress Index inched lower, to 2.2% in March from 2.3% in February. Beyond company-specific situations, the risk of covenant violations among speculative-grade companies remains low over the next 12-15 months. The Covenant Stress Index reflects 19 with elevated risk of covenant violations at the end of March.