Investment-grade-rated U.S. nonfinancial corporations deleveraged further in the fourth quarter of 2021.
Companies have significantly improved their balance sheets since the arrival of COVID-19 rocked markets in the first quarter of 2020. Those rated BBB- or higher by S&P Global Ratings have lowered their debt-to-equity ratios — a closely watched measurement of corporate leverage determined by calculating total liabilities as a percentage of shareholder equity — for seven successive quarters.
Falling leverage ratios
The median debt-to-equity ratio for investment-grade U.S. nonfinancial companies was 90.3% in the fourth quarter of 2021, down from 90.7% in the third quarter, according to the latest data from S&P Global Market Intelligence.
The decline in leverage came even as total debt continued to rise. The total liabilities of the nonfinancial corporate sector reached a record $11.650 trillion in the last quarter of 2021 from the pre-pandemic level of $10.147 trillion. Yet the median debt-to-equity ratio for investment-grade-rated companies is lower than it was before COVID-19 appeared.
Strong economic growth of 5.7% in 2021 supported a strong year for earnings while the cost of debt was kept low by a supportive Federal Reserve. That is now set to change dramatically as the Fed raises rates to try to head off inflation.
Median leverage increased for noninvestment-grade-rated companies in the fourth quarter, to 131.4% from 128.7%. That was still lower than the pre-pandemic level of 133.8% and significantly down from the peak of 158.2% in 2020.
Sector breakdown
The highly cash-generative information technology sector has the lowest leverage of the 10 nonfinancial sectors tracked by Market Intelligence. The median debt-to-equity ratio for investment-grade tech companies was just 59% in the fourth quarter, down from a pre-pandemic level of 64.3%.
By contrast, consumer discretionary, energy and investment-grade utility companies still have higher debt-to-equity ratios compared to the fourth quarter of 2019.
