Rising interest rates and a slowing economy are reducing US companies' ability to repay their debts.

The median interest coverage ratio of companies rated investment-grade by S&P Global Ratings sank in the fourth quarter of 2022 to 6.95 from 8.05 in the previous quarter, according to the latest S&P Global Market Intelligence data.

The ratio — calculated by dividing earnings before interest and tax by the cost of a company's debt-interest payments — is a closely watched measure of solvency and has slumped sharply since a peak of 8.94 in 2022.

The sharp decline took the median ratio for companies rated BBB- or higher to an eight-quarter low, undoing much of the buffer built up during the pandemic. Still, the ratio remains higher than the pre-COVID level of 6.09 in the fourth quarter of 2019.

The cost of interest payments is also rising as a percentage of earnings for non-investment-grade companies. The median ratio fell to a six-quarter low of 3.57 in the fourth quarter of 2022, down from 4.39 in the third quarter.

Debt positions decline slightly

With the cost of debt rising, companies are also reducing leverage.

The median debt-to-equity ratio — a closely watched measurement of corporate leverage determined by calculating total liabilities as a percentage of shareholder equity — of investment-grade companies fell to 93.9% in the fourth quarter of 2022 from 96.4% in the third quarter.

Deleveraging has been ongoing since early 2020 after companies ratcheted up debt levels to secure liquidity amid the lockdowns designed to stop the spread of COVID-19.

For non-investment-grade companies, the median ratio fell to 124.2% in the fourth quarter from 125% in the third quarter. The level is down from a peak of 160% in the second quarter of 2020 but largely stabilized in 2022.

While the median debt-to-equity ratio is back to pre-COVID levels for investment-grade companies, lower-rated companies have gone further and are significantly lower than the end-2019 level of 137.8%.