Corporate defaults are poised to rise in the year ahead, led by the troubled energy sector, according to Moody’s Investors Service.
The rating agency reports that its Liquidity Stress Index (LSI) jumped to 6.8% at the end of December 2015 from 6.4% in November. This represents the index’s highest level since February 2010, and puts it above the LSI’s long-term average of 6.7%, which signals a likely rise in the default rate in 2016, Moody’s says in a new report.
The index reading for the oil and gas sector increased to 19.6% in December from 19.3% in November, “as low oil prices continued to weaken liquidity and raise default risk,” the Moody’s report says, and that liquidity weakness is now also starting to spread to lower-rated issuers in other sectors. The non-energy LSI rose to 3.6% in December from 3.0% in the prior month, the Moody’s report says.
Overall, speculative-grade liquidity downgrades outpaced upgrades by a factor of 1.74 in 2015, with 141 downgrades and 81 upgrades, the Moody’s report says. The ratio is at its highest level since 2008 when it hit a record level of 2.96. “Energy has been the key driver of liquidity downgrades, followed by metals and mining, amid weakening commodities demand in major developing countries such as China,” the Moody’s report says.
“Nevertheless, speculative-grade liquidity is much better than it was during the depths of the last recession, and should be supported this year by moderate economic growth and modest maturities for the market overall,” says John Puchalla, senior vice president at Moody’s.