Debt burden grows for rated US corporations in Q1

Total debt constituted a larger share of shareholder equity in the first quarter than in the previous quarter for nonfinancial US investment-grade and non-investment-grade companies.

The debt-to-equity ratio increased 131 basis points quarter over quarter to 85.10% for the median nonfinancial investment-grade company, S&P Global Market Intelligence data shows. Investment-grade companies are those rated BBB- and above by S&P Global Ratings. The rise in debt-to-equity was less pronounced for non-investment-grade companies, with the median ratio ticking up to 117.6% from 117.5%.

The median debt-to-equity ratio for investment-grade companies increased following quarter-over-quarter declines in the previous two quarters. Companies in this cohort collectively added over $78 billion in total debt during the quarter amid strong investor demand for corporate debt assets. Meanwhile, the median debt-to-equity ratio for non-investment-grade companies has increased for two straight quarters.

The median debt-to-equity ratio among nonfinancial investment-grade companies increased in five sectors. The energy sector's median ratio rose the most, 7.25%, while the materials sector's median ratio dropped nearly 7%, the biggest decrease. Other sectors with ratio decreases included information technology, healthcare, industrials and consumer staples.

Among nonfinancial non-investment-grade companies, median debt-to-equity increased in six sectors and fell in four sectors. The median debt-to-equity ratio climbed the most for real estate, up 656 basis points, and declined the most for utilities, down 1,470 basis points.

Interest coverage weakens in Q1

Interest coverage weakened for both nonfinancial US investment-grade and non-investment-grade companies alongside higher debt-to-equity ratios. Interest coverage gauges the strength of earnings before interest and tax, or EBIT, relative to interest liabilities.

Interest liabilities may continue to carve into earnings as interest rates remain elevated. The US Federal Reserve's benchmark interest rate has been held within a range of 4.25% to 4.50% this year, higher than at any time between 2008 and late 2022. Meanwhile, the yield for the 5-year US Treasury note, a benchmark for corporate debt, varied between 4% and 4.6% for most of the first quarter. This was higher than at any point in the decade before the COVID-19 pandemic.

EBIT covered debt interest payments 6.07x for the median nonfinancial investment-grade company in the first quarter, down from 6.16x in the fourth quarter of 2024. This was the lowest median interest coverage ratio for this cohort since the first quarter of 2024.

Though the median interest coverage ratio dropped in the analysis of all investment-grade companies, the metric fell in only four of six nonfinancial sectors. The ratio dropped the most in the communication services sector with a decline of 165 basis points.

The median interest coverage ratio for nonfinancial non-investment-grade companies dipped 27 basis points to 2.62x, the lowest point in the past three years. The ratio also weakened in seven sectors in this group of rated companies, led by utilities, which dropped to 1.83x from 3.56x. In contrast, the ratio strengthened for the materials, healthcare and energy sectors.

The energy sector experienced the most improvement in median interest coverage ratios across both investment-grade and non-investment-grade companies.