Corporate liquidity appears to be gaining strength, reinforcing the expectation that defaults will remain low, reports Moody’s Investors Service in a new report.
Moody’s says that its Liquidity-Stress Index (LSI) dipped to 3.7% in mid-May, continuing its recent decline; and, it notes that the index is on track to fall for a third consecutive month, reversing some of its rise in the second half of 2013. The index falls when corporate liquidity appears to improve, and rises when it weakens.
“Recent declines suggest that U.S. speculative-grade companies continue to have relatively good liquidity and that credit conditions remain benign,” says John Puchalla, senior vice president at Moody’s. “The low reading is in step with our view that the U.S. speculative-grade default rate will remain low into early 2015.”
The rating agency notes that the LSI has mostly shrugged off the headwinds that have emerged since the start of this year, including equity market volatility, geopolitical tensions, and the effects of bad weather on the U.S. economy in the first quarter. “Corporate earnings were relatively flat in the first quarter but the stability remains supportive of liquidity, while investors’ continued strong demand for riskier debt is allowing companies to address their maturities,” it says.