Bangkok--18 Apr--Moody's Investors
New Asian Liquidity Stress Index shows speculative-grade liquidity at the highest levels for 3-years
- Welcome to the inaugural edition of the Asian Speculative-Grade Liquidity Stress Index.
- This index, to be published on a monthly basis, examines liquidity trends throughout the Asia Pacific region (ex Japan and Australia) for the rated speculative-grade portfolio and quantifies that proportion with inadequate liquidity (see page 4 for a description of inadequate liquidity).
- The Asian Liquidity Stress Index covers 100 rated companies, across 12 countries and 22 core industry groupings and accounts for more than US$43.4 billion of rated debt (a full list of issuers and ratings is attached as Appendix A).
- In the US, we have published individual liquidity scores since 2002 and they have proved to be very a very reliable leading indicator of defaults by some 9 months.
- While we have no plans to publish individual scores for Asian issuers, we do conduct the same analysis process, therefore our published inadequate component equates to an SGL-4 ranking (see page 4 for a breakdown of the scores).
- Overall, liquidity in Asia is typically weaker than other regions, in part due to the stage in the debt capital markets evolution and a greater reliance on local bank markets to provide funds. In particular, Asia sees a far greater incidence of relationship banking whereby banks, rather than provide committed funding instead habitually roll over short term and uncommitted lines. This was most evident during the Global Financial Crisis where companies with extremely high levels of short term debt successfully rolled over credit lines.
- However, within Asia (ex Japan), liquidity seems to have fully rebounded and is now at the strongest levels for more than three years, in part fuelled by improving macro-economic environments as well as overseas investor demand for diversity and yield. The result is a growing body of names coming to the debt capital markets table to secure long-term funding.
Global Challenges
BUT NO PRESSURE YET ON ASIAN LIQUIDITY
Political tensions in the Middle East, high oil prices, and the aftermath of the tragic earthquake in Japan have not had a significant effect on speculative-grade liquidity conditions to date. Many companies can at least pass some or all of their higher fuel costs onto customers, have hedged their near-term exposure, or aren’t meaningfully exposed to the recent events in the Middle East and Japan. In fact, our internal data indicates that liquidity stress for speculative-grade issuers in Asia (outside of Japan and Australia) is at the lowest level in more than three years.
Still, the possibility that sustained global challenges could raise risk premiums and filter back into Asian economies remains a threat. Early March 2011 saw some anecdotal evidence of investors pushing back on pricing in proposed speculative-grade deals throughout the region. However, late March and early April have seen a flurry of new deals successfully price and close, frequently at material levels of oversubscription.
In another sign that liquidity is healthy for speculative-grade companies, Moody’s Asian Liquidity Stress Index fell to 12% for March, the lowest level for more than 3 years, indicating that some 88% of the portfolio had adequate or better liquidity. The Asian Liquidity Stress Index is signaling a low overall likelihood of default for speculative-grade companies. This trend is consistent with other regions, for example, in the US the similar index score is 4.4% - the lowest since June 2005.
The following chart examines the trends in adequate versus inadequate liquidity for Asian issuers since Q2 2007. In March 2011, only 12% of the portfolio had inadequate liquidity versus 37% in the darkest period of the Global Financial Crisis in Q4 2008. Given that Moody’s takes a 12-18 month forward view of liquidity, this analysis should, as in the US, prove to be a good leading indicator.