KUALA LUMPUR (JUNE 8): The Asian Liquidity Stress Index (LSI) rose to 16.3% in May from 15.3% in April as the net number of companies with the lowest speculative-grade liquidity score (SGL-4) increased by one to 16, according to Moody’s Investors Service.
In a statement Friday, Moody’s said the LSI, which was the highest since mid 2010 indicated a fall in speculative-grade liquidity.
Nevertheless, the index remains well below the 37% high recorded in the fourth quarter of 2008 during the financial crisis, it said.
A Moody's vice president and senior credit officer Laura Acres said the spate of high-yield issuance seen from January through April came to a halt in May owing to market volatility and concerns over corporate governance for some Chinese debt issuers.
The LSI in May rose for Chinese speculative-grade companies to 19.1% from 15.6 in April. The reading reflects the addition of two non-property companies to the list of those with SGL-4.
“The Chinese property sub index held steady at 23.1% in May, a high level equating to almost one in four Chinese property companies having weak liquidity,” she said.
Meanwhile, the 12-month trailing default rate for Asia Pacific speculative-grade companies remain unchanged in May from 2.63% in April.
The correlation between weak liquidity and default remains high. About 93.8% of Asian companies at SGL-4 are rated B1 and below, up from 93.3% in April, she said.
The number of downgrades on speculative-grade companies outpaced upgrades since the third quarter of 2011, said the report.
“The ratio of downgrades to upgrades in April and May, at six to one, was the highest since the depths of the financial crisis during the second quarter of 2009”.
“But the percentage of speculative-grade companies with a negative outlook or on review for downgrade decreased to 36.7% from 39.8% in April, although this reflected the withdrawal of two ratings with a stable outlook”.
Bonds issuance by Asian high-yield companies is expected to remain low until the crises in the Eurozone begins to show signs of stability.
“If fallout from the euro area sovereign debt crisis spreads and lenders clamp down, then speculative-grade companies could have a hard time refinancing pending maturities or addressing potential covenant violations,” said Acres.
Asia experiences generally weaker liquidity that in other regions partly as its debt capital markets are not as mature and because companies are more reliant on local bank markets for funding.
“Relationship banking, which relies on rolling over short-term and uncommitted lines of credit rather than providing committed levels of funding, is far more common in Asia than other major economic regions,” she said.