The cost of interest payments is a growing burden for US companies even as debt stabilizes as a percentage of equity.

Higher interest rates have raised borrowing costs for companies, making new debt more expensive and increasing the cost of refinancing old debt. The median interest coverage ratio — calculated by dividing earnings before interest and tax by the cost of a company's debt-interest payments — of companies rated BBB- or higher by S&P Global Ratings fell to 6.43 in the third quarter from 6.72 in the previous quarter.

The ratio is lower for companies with credit ratings of below BBB- as they have weaker financial positions and face even higher borrowing costs when they tap the debt markets. The median ratio for non-investment-grade companies fell to 2.85 in the third quarter from 3.13 in the second quarter.

Sectors

The worsening situation is particularly widespread for non-investment-grade rated companies. Of the 10 sectors tracked by Ratings, information technology was the only one to register a quarter-over-quarter increase in the median ratio in the third quarter, to 2.85 from 2.66.

The declines were particularly sharp in utilities, to 2.14 from 3.19; communication services, to 1.55 from 2.00; and energy, to 2.60 from 3.26.

Debt

While the cost of servicing debt is a growing burden for companies, total debt levels are stable.

The median debt-to-equity ratio — a measurement of corporate leverage determined by calculating total liabilities as a percentage of shareholder equity — of investment-grade companies declined to 87.2% from 87.7% in the third quarter.

The median ratio fell to 122.4% from 122.6% for companies rated non-investment-grade, continuing the theme of declining levels since the COVID-19 pandemic began in 2020.

The declines were particularly dramatic in the consumer staples, real estate and consumer discretionary sectors, whereas information technology and industrials stood out for having climbing median debt-to-equity ratios.