Moody’s Investors Service Inc.’s liquidity stress index (LSI) for U.S. speculative-grade companies has now ticked up to 10.4% as of mid-April, from 10.3% at the end of March, the New York-based rating agency announced on Tuesday.
The index rises when corporate liquidity appears to weaken and falls when it appears to improve.
The LSI’s steady gains also indicate rising default risk, Moody’s says. It forecasts that the U.S. speculative-grade default rate will climb to 6.0% by the end of 2016, up from 4.1% this past February, and well above its long-term average of 4.7%. Additionally, liquidity rating downgrades have continued to outpace upgrades in April, Moody’s says.
“The composite LSI has been ominously steaming higher since late 2014 because of cash flow pressure in energy and other commodity sectors,” says John Puchalla, senior vice president at Moody’s, in a statement. “Liquidity issues have been seeping into some other sectors, but on the whole U.S. speculative-grade companies are still drawing support from modest economic growth and credit market access that is regaining some traction.”
Moody’s covenant stress index (CSI), which measures the extent to which speculative-grade companies are at risk of violating debt covenants, also rose to 6.4% in March from 4.6% in February, Moody’s says, and surpassed its long-term average of 5.8%.
The CSI is now at its highest level since December 2009, “due largely to the elevated risk of covenant violations in the energy sector,” the rating agency notes.