US companies deleveraged further in the second quarter, with a noticeable acceleration by those with lower credit ratings.

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 fell to 86.9% in the second quarter of 2023 from 87.6% in the first quarter, according to data from S&P Global Market Intelligence.

The decline continues a trend since 2020 when companies issued record levels of debt to raise cash in the early stage of the COVID-19 pandemic.

The median debt-to-equity ratio fell more sharply among companies rated below BBB- by S&P Global Ratings in the second quarter to 121.6%, down from 126.2%.

The reduction in corporate gearing was particularly apparent in the industrials and consumer staples sectors, whereas debt rose relative to equity in the information technology sector.

Rising cost of debt

While debt is becoming relatively smaller, the cost of repaying interest on debt is becoming a bigger and bigger burden for investment-grade-rated US companies.

The median interest coverage ratio of companies rated BBB- or higher by S&P Global Ratings fell to 6.54 in the second quarter from 6.72 in the previous quarter, according to the latest Market Intelligence data. A lower ratio indicates a larger burden from interest payments.

Rising interest rates have pushed up the cost of bank loans and debt issuance, increasing the cost of refinancing and new borrowing.

The ratio is a closely watched measure of solvency calculated by dividing earnings before interest and tax by the cost of a company's debt-interest payments. For investment-grade companies, the ratio has slumped sharply since a peak of 8.97 in 2022 when ultra-low interest rates facilitated cheap borrowing.

There was better news for companies with lower credit ratings. The median ratio of non-investment-grade companies rose to 3.09 from 2.89 in the first quarter, though that is still lower than at the end of 2022.