Corporate Liquidity Squeeze on Horizon
Corporate liquidity is in for a slight squeeze in the future according to the latest Liquidity-Stress Indicator (LSI) from Moody's Investors Service. The LSI was unchanged in December; however, at 3.7%, it is at its highest reading since May 2017.
"We expect slower corporate earnings growth and tighter funding conditions this year to continue to lift the LSI," said John Puchalla, a senior vice president with Moody's. "But healthy liquidity overall will continue to keep a lid on defaults, with both the LSI and the U.S. speculative-grade default rate increasing but set to remain below their long-term averages."
Companies with weak liquidity (SGL-4) as determined by Moody's speculative-grade liquidity (SGL) saw default rates increase from 34.8% to 41.8% even with the overall speculative-grade default rate decline. Moody's expects U.S. speculative-default rates will decline to 2.3% in April from the year-end rate of 2.8%. It's predicted it will jump to 3.4% by the end of 2019.
An index increase means corporate liquidity is weakening, while a decrease in the LSI shows improvement.
-Michael Miller, managing editor