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US companies' debt cushion smallest since Q1 2021 :BofA

Published 11/08/2023, 01:07 PM
Updated 11/08/2023, 04:44 PM
© Reuters. The Wall Street sign is pictured at the New York Stock exchange (NYSE) in the Manhattan borough of New York City, New York, U.S., March 9, 2020. REUTERS/Carlo Allegri/File Photo
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By Matt Tracy

(Reuters) - Rising borrowing costs made a slight dent in U.S. companies' ability to make interest payments on their debt in the third quarter despite a boost in earnings, according to BofA Global Research.

High-grade corporate borrowers' average interest coverage ratio - how many times over a company's income covers their interest payments - fell to 10.71x last quarter from 11.24x in the second quarter, the Tuesday report's authors found based on preliminary data for 75% of companies in BofA's sample that tracks public debt issuers.

Coverage ratios hit their lowest since the first quarter of 2021, when companies in many sectors struggled with pandemic-related supply cost increases and weak demand.

But the most recent decline came at the same time that company earnings grew. Median year-over-year earnings growth jumped 4.2% in the third quarter, from 0.6% in the second quarter, according to BofA Global.

Borrowers' weaker interest coverage stems from higher borrowing costs, the report noted. The median cost of debt increased to 3.77% in the third quarter from the second quarter - its highest since the fourth quarter of 2018. Companies' gross debt was little changed, but net debt growth turned negative for the first time since the third quarter of 2021.

© Reuters. The Wall Street sign is pictured at the New York Stock exchange (NYSE) in the Manhattan borough of New York City, New York, U.S., March 9, 2020. REUTERS/Carlo Allegri/File Photo

This has led to slightly improved leverage on companies' balance sheets, as higher-rated borrowers used their earnings to pay down some of their outstanding debt and ease pressure on refinancing costs.

"(Investment-grade) issuers continued to manage their balance sheets conservatively in 3Q," wrote Yuri Seliger, credit strategist at BofA Global.

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