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Capital Markets

Junk Market Liquidity Stress Increases

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April 05, 2016

Could it eventually impact the investment grade market?

Bond2Moody’s Investor Services says the number of companies on the lower end of the credit spectrum that are having trouble raising cash is increasing. It’s a dire situation that is putting more companies at risk of default. It could also potentially spill over to investment grade companies, raising borrowing costs for them if it continues.

Moody's Liquidity Stress Index (LSI) jumped to 10.3% in March from 9.0% in February, with the energy LSI similarly jumping to a record high of 31.6% from 27.2% over the same timeframe. Moody’s also reported that March showed “a record number of monthly speculative-grade liquidity downgrades,” with close to half attributable to weakness in energy-related sectors.”

“There is a risk that rising credit losses will make it more expensive for even investment-grade companies to issue new debt,” said John Puchalla, a Moody's Senior Vice President. “However, investment-grade borrowing costs remain pretty low by historical standards and IG bond issuance in Q1 was on par with Q1 2015, which was a record amount.”

Mr. Puchalla noted in a statement that the LSI is “traveling the same path it took at the start of the last major turn in the credit cycle that started in mid-2007.” The peak was an LSI of 20.8% in March 2009.

“It’s fair to say there is a risk when credit losses grow and are severe enough that it could affect even higher rated borrowers,” Mr. Puchalla said. However, even though debt markets “are more fickle than they were 6-12 months ago,” companies in better shape are still able to access the debt market.

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