North American corporates’ strong liquidity could erode after 2017: Moody’s

Liquidity weakness is concentrated primarily in the energy sector, the report notes, where Moody’s expects between 7% and 10% of companies to have liquidity shortfalls because of weak oil prices. Excluding the energy, chemicals, and mining sectors, an “exceptionally high percentage” of issuers have sufficient liquidity to cover their cash requirements in 2016, the report says.

“The strong liquidity position primarily reflects low levels of debt maturities as most companies have benefited from strong capital market access over the last few years,” says Raj Joshi, vice president and senior analyst at Moody’s.

However, the Moody’s also warns that these conditions will likely not last. Rising debt levels, “and a wave of debt maturities after 2017 will pressure liquidity if companies do not have steady access to capital markets over the next two years,” the Moody’s report says.

“While corporate liquidity is strong, there is a high volume of outstanding debt that companies in this universe will need to refinance over the next three to four years when the economic environment and monetary policy could be less accommodating,” the report says.

Moody’s warns that speculative-grade companies are particularly vulnerable to liquidity issues, if earnings growth declines, and markets provide less liquidity, as maturities begin to increase sharply after 2017.

“Investment-grade companies have also taken on significant amounts of debt to fund shareholder returns and acquisitions,” says Joshi. “These companies will also require continued market access at favorable rates to refinance high volumes of debt and maintain the levels of shareholder payouts and acquisitions of the last five years.”