Moody's: Liquidity pressures at emerging market high-yield firms back to record highs

LONDON, Oct 27 (Reuters) - The proportion of emerging market high-yield companies who have seen their liquidity position weaken in September has climbed back to June’s record high, with firms in Latin America driving the overall increase, Moody’s said in a research report.

The reading of Moody’s emerging markets liquidity stress indicator returned to an all-time high of 25.8% last month - up 1 percentage point from August and compared with its long-term average of just under 20%, Moody’s found. A rising trend indicates upward pressure on default rates.

The steep rise from April’s 23% reading to September was driven by a rise in the Latin America sub-indicator, said Annalisa Di Chiara, senior vice president at Moody’s and the report’s author.

“Our ... indicator is likely to remain elevated amid longer-term performance concerns and rising refinancing risks, particularly for lower rated companies,” Di Chiara said.

The economic impact of the coronavirus pandemic has roiled global markets and hit many emerging economies particularly hard. Latin America is the worst-affected region, with about 27% of total COVID-19 cases, followed by Asia, North America and Europe, according to a Reuters analysis.

Moody’s said that weakening economic conditions had put pressure on liquidity profiles of companies in Latin America, particularly in Brazil. While sound fiscal and monetary policies by central banks had helped ease market conditions, defaults continued to rise through September, the report said.

Moody’s rated 306 high-yield companies across 36 countries in its liquidity stress indicator, broken down into four regional sub-indicators.

Of the total, 79 companies now hold the weakest liquidity score, the report stated, indicating that access to capital markets could be challenging while buffers are limited for some of lower rated companies.

Last week, a report by the Bank for International Settlements (BIS) found that cross-border lending to emerging markets fell in the second quarter for the first time since 2016, mainly driven by a decline of $43 billion in Latin America and the Caribbean. (Reporting by Karin Strohecker; Editing by Alison Williams)