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Moody's Liquidity-Stress Index (LSI) increased to 4.2% in mid-March from 4.0% in February and 3.9% in January on the back of a sharp rise in liquidity stress in the oil and gas sector, the rating agency says in its most recent edition of SGL Monitor. But the increase masks the continuing, overall strength of US speculative-grade companies' liquidity positions, with the composite index minus energy unchanged from February's record low 2.6% as of mid-March.
Moody's Liquidity-Stress Index falls when corporate liquidity appears to improve and rises when it appears to weaken.
"US speculative-grade companies continue to derive support from an improving economy, solid earnings and maturity extensions established earlier in the credit cycle," says Senior Vice President, John Puchalla. "But energy companies, and particularly oil and exploration firms, which tend to be smaller and less diversified, are vulnerable to the current slump in oil prices."
The LSI for the energy sector alone has climbed to 9.8% from just 4.5% in December, Puchalla says. Deterioration in the sector is not uniform. While oil and exploration and production firms are taking the biggest hit from falling oil prices, refinancing and marketing companies are feeling less of a pinch. The LSI for oilfield service companies was a modest 2.2% at the end of February, though Moody's expects a declining rig count to create incremental pressure on their cash flow and liquidity.
Speculative-grade liquidity, or SGL, rating downgrades continue to outnumber upgrades so far in March, but apart from the energy sector, most downgrades were due to company-specific concerns and are not related to any broader liquidity issues. Indeed, the LSI supports Moody's predication that the speculative-grade default rate will remain low over the next 12 months, rising to just 2.9% in February 2016 from 2.0% currently.
Moody's Covenant-Stress Index came in at 2.3% in February, up slightly from 2.1% in January. The index measures the extent to which companies are at risk of violating debt covenants, and decreases when headroom under covenants appears to increase. The recent increase was due to covenant compliance concerns at Alliance One International, Bombardier and HGIM Corp., though overall the index indicates a low risk of covenant violations among US speculative-grade issuers over the next 12-15 months.
