Moody’s reports that that its Liquidity-Stress Index, which falls when corporate liquidity appears to improve and rises when it appears to weaken, rose slightly by mid-August, up from a record low in July. Yet, the index remains at a historically low level, it says.
“The low LSI reading is consistent with our view that the U.S. speculative-grade default rate will remain near its current low level over the next year,” said John Puchalla, a Moody’s vice president and senior credit officer. It currently projects the speculative grade default rate, which was 3.3% in July, will rise to 4.0% in October, then decline to 3.1% by July 2013.
Moody’s says that low borrowing costs and accessible markets are supporting healthy speculative-grade liquidity.
“Some low-rated companies could have trouble borrowing at affordable rates, however, and contagion from the ongoing euro area debt crisis and slowing economic growth remain risks to liquidity,” it cautions.
And, it notes that August is the second consecutive month in which speculative-grade liquidity rating downgrades have outpaced upgrades. Yet, Moody’s says these downgrades reflect covenant pressures, reduced cash levels, and weak revenue and EBITDA for the affected issuers, rather than a broad decline in speculative-grade liquidity.