Amid signs of improving corporate liquidity, speculative-grade defaults are expected to decline in the year ahead, Moody’s Investors Service announced on Wednesday.
Moody’s liquidity stress index (LSI) will finish the year with a drop, which signals an improvement in corporate liquidity, and this is “a strong sign” that defaults will decline among speculative-grade companies in 2017, the New York City-based credit rating agency says in its announcement.
“The past year has been choppy for speculative-grade liquidity, with weakness in the commodity sector pushing the LSI to a six-year high in the first quarter and contributing to a jump in defaults,” says John Puchalla, senior vice president, in a statement.
“But since then, the index has trended more favorably, falling below its historical average of 6.8% in October, a milestone related to the gradual let-up of challenges in the oil and gas sector and continued good market access for most speculative-grade borrowers,” he adds.
Notably, the oil and gas LSI has dropped to 17.1% from a peak of 31.6%, Moody’s reports, highlighting the “easing of liquidity and default pressures for these firms heading into 2017… Downgrades have largely dissipated, with many companies having defaulted or improved their balance sheets and investment capacity through asset sales and new financing.”
Moreover, an expected pick-up in U.S. economic growth in 2017 would also benefit speculative-grade liquidity, Moody’s says. Currently, the credit rating agency is forecasting that the U.S. speculative-grade default rate will fall to about 4.0% by the end of 2017 from 5.6% currently.