Even the most speculative form of North American debt is muddling through the global debt crises relatively unscathed.
Despite fears of European defaults and uncertainty around the U.S. debt ceiling, high yield debt is holding in, as proven by the performance of Moody's Investors Service's Liquidity Stress Index. This index, which tracks the liquidity of the riskiest types of high yield debt, fell to a record low of 3.9 per cent in June, a sign that speculative grade liquidity is improving.
The index's all-time high was 20.9 per cent in March, 2009.
Moody's attributed the performance to good fiscal governance. "Perhaps because of the uncertainties related to European sovereign debt, the fallout from the U.S. housing slump, incremental regulations and a federal debt-ceiling showdown, U.S. companies have been stockpiling liquidity," said John Puchalla, Moody's vice-president and senior credit officer. "In some sectors, companies have increased layoffs and furloughs to protect earnings and cash flow in the event economic conditions weaken further."
Because companies have been so prudent, Moody's expects the specuatlive grade default rate to fall to 1.6 per cent in the second quarter of 2011. It sat at 2.9 per cent last quarter, and has a historical average of 4.5 per cent.
Moody's speculative grade liquidity ratings cover 610 issuers who have about $1.4-trillion (U.S.) of debt outstanding. These issuers are largely U.S. firms, though there are some Canadian names on the list, including Quadra FNX Mining.
While liquidity is improving for high yield debt in general, there are select sectors that continue to struggle. Moody's points out that liquidity stress remains high for the "relatively small population" of speculative-grade utilities.
Tim Kiladze