Corporate liquidity improved in February, signalling a decline in defaults in the year ahead, according to the latest reading from Moody’s Investors Service’s Liquidity-Stress Index (LSI) published on Thursday.
The rating agency reports that the LSI slipped to 5.7% in February from 6.2% in January (the index declines when corporate liquidity improves and rises when liquidity weakens). U.S. speculative-grade companies continue to benefit from investors’ hunt for yield in a continued low interest rate environment, Moody’s says in a statement.
“Leveraged loan and bond issuance combined totaled well over US$190 billion in the first two months of this year, almost three times the level in the same period last year,” says Moody’s senior vice president, John Puchalla. “Cash flow gains, modest maturities and good covenant flexibility are also bolstering liquidity.”
The overall trend in the index over the last 12 months points to a likely decline in the U.S. speculative-grade default rate in 2017, Moody’s says. It forecasts the rate will drop to 3.5% in January 2018 from 5.8% currently.
The rating agency also notes that it recorded 15 upgrades of speculative-grade liquidity ratings in the month, versus just three downgrades. “Many of the upgrades were tied to operational improvements that are bolstering cash flow, including for commodities companies,” Moody’s says.