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Moody's Investors Service says that its Asian Liquidity Stress Index (LSI) deteriorated in August, with 21.8% of its speculative-grade portfolio demonstrating weak liquidity versus 16.8% in July.

"We saw the largest month-on-month change since Sep 2010, and it reflects a net increase of five companies to the lowest speculative-grade liquidity score category (SGL-4), which now totals 22 companies," says Laura Acres, a Moody's Senior Vice President.

"The index, which increases when speculative-grade liquidity appears to decrease, is at its highest level since the first quarter of 2010, but is also well below the high of 37% posted during the fourth quarter of 2008 amid the financial crisis," adds Acres.

The steady improvement of the liquidity sub-index for Chinese speculative-grade companies also reversed in August. At 20.4%, the sub-index is now at its highest level since Moody's began publishing it in April 2011, and is up from 16.3% in July.

"The liquidity sub-index of Chinese property companies also rose to 25.0% from 17.9% in July, but it is still lower than in March, when it touched a peak of 26.9%. Now, almost one in four of the high-yield Chinese property companies we rate is considered to have weak liquidity," Acres adds.

During July and August, the ratio of corporate family rating downgrades to upgrades was 5:1. It was the fifth consecutive quarter where downgrades outpaced upgrades, and Q3 also showed the highest ratio of downgrades to upgrades since Q2 2009.

The percentage of speculative-grade companies with a negative rating outlook or on review for downgrade remained nearly unchanged from July at 35.6%.

In August, the net amount of high-yield debt rated by Moody's in Asia rose slightly to $40.9 billion versus $40.7 billion in July, as a result of Sound Global's (Ba3 stable) US$150 million senior unsecured bond due 2017.

But, for the rest of the year, debt issuance will likely remain slow as long as uncertainty in the euro area continues. If the sovereign-debt problems hurt economicgrowth in Asia or cause lenders to tighten their lending standards further, this will impact lending rates to speculative-grade companies and may result in deteriorating liquidity for some.

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