High-yield companies appear to have the liquidity necessary to weather the ongoing economic uncertainty, Moody’s Investors Service says in a new report.
The rating agency reports that its Liquidity-Stress Index (LSI), which measures corporate liquidity, continues to hold at historically low levels. The index, which falls when speculative-grade corporate liquidity appears to improve and rises when it appears to weaken, declined in mid-July after rising a bit from an all-time low in May.
Moody’s says that with the index sitting at historic lows, it is indicating that high-yield companies are well-positioned to manage in an uncertain economic environment for the next 12-18 months.
John Puchalla, a Moody’s vice president and senior credit officer notes that the index is below the level it finished the year at, and remains far below levels that have warned of danger in the past. “Sovereign-debt concerns, a growth downshift in developing markets and tighter credit market conditions present a risk to corporate earnings and liquidity but companies are managing these headwinds,” he said.
Moody’s says that companies with high-yield debt are keen to avoid a replay of the 2008-2009 downturn when deteriorating liquidity led to a spike defaults. And, it notes that, so far, corporate earnings growth and a receptive debt market “have allowed most speculative-grade companies to proactively manage liquidity and, where necessary, refinance pending maturities at a manageable cost.”
Additionally, Moody’s index for assessing companies’ ability to comply with their financial covenants remains low, suggesting that companies “have adequate cushion” to adhere to their covenants over the next 12 to 15 months, it says.