28 Jul, 2022

Lower-rated U.S. companies bear the brunt of rising costs

By Peter Brennan and Umer Khan


Rising operating expenses, including wages and energy bills, squeezed margins for nonfinancial U.S. companies rated below BBB- in the first quarter of 2022.

Sky-high inflation translated into higher costs of doing business in the first three months of the year and, with the Consumer Price Index hitting 9.1% in June, the pressure on margins is likely to have increased.

The median operating expenses-to-total revenue ratio — an important metric for measuring a company's margin — for non-investment-grade-rated nonfinancial companies rose to 92.0% in the first quarter of 2022, up from 90.8% in the fourth quarter of 2021, according to data from S&P Global Market Intelligence.

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Broad rise

The increase was broad-based, with a higher median ratio in the non-investment-grade component of eight of the 10 nonfinancial sectors tracked by S&P Global.

The rise in the ratio was driven by an increase in operating expenses to $710.99 billion in the first quarter of 2022, up from $697.1 billion at the end of 2021.

Operating expenses fell slightly for investment-grade-rated companies, to $2.724 trillion from $2.749 trillion. That contributed to a slight decline in the median ratio for companies rated BBB- or higher, to 83.1% from 83.6% in the fourth quarter of 2021.

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Energy hit

In the midst of the COVID-19 pandemic, a number of debt and liquidity metrics convulsed before steadily returning to pre-COVID-19 levels. Operating expenses ratios, however, have generally been more stable.

The median investment-grade ratio has hovered between 82% and 86% in that period, while for non-investment-grade companies the range has been 90% to 95%.

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Revenues have broadly kept pace with rising expenses during that time. The energy sector, though, endured a sharp increase in operating expenses in the first quarter of 2022: Costs rose 15.8% among investment-grade energy companies and 32.8% among lower-rated companies, contributing to stark increases in the median ratios for companies in the sector.

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