The strength of US investment-grade corporate earnings relative to interest liabilities weakened in the third quarter of 2024 as companies continued to contend with elevated interest rates.
Earnings before interest and tax were able to cover debt-interest payments 6.12 times for the median US nonfinancial investment-grade company in the quarter, according to S&P Global Market Intelligence data. This metric, known as the interest coverage ratio, fell from a revised 6.61 ratio in the second quarter. Investment-grade companies are those rated BBB- and above by S&P Global Ratings.
Meanwhile, the median interest coverage ratio did not change among nonfinancial non-investment-grade companies with credit ratings below the BBB- threshold, holding steady at 2.94 from the second quarter to the third quarter.
Interest rate levels remained at a two-decade high for most of the third quarter, continuing to pressure companies even amid strong economic growth. Some relief came in September when the US Federal Reserve eased its benchmark interest rate for the first time in four years with a 50-basis-point cut, followed by a subsequent 25-bps cut in November. Though another cut is expected before the end of the year, the pace of reductions may slow in 2025.
Sectors
In the third quarter, the median interest coverage ratio for investment-grade companies declined in six of the 10 nonfinancial sectors tracked by Ratings. The ratio for the energy sector dropped the most with a 31% plunge to 5.12, while the real estate sector had the lowest median ratio at 2.56.
Consumer staples companies had the highest median interest coverage ratio in the quarter and the strongest improvement from the previous quarter among nonfinancial investment-grade companies. The ratio for the sector climbed over 34% to 10.85.
Among non-investment-grade companies, the median interest coverage ratio in the third quarter decreased in only four nonfinancial sectors from the second quarter. The ratio for the consumer discretionary sector weakened the most with a 6.3% slide to 3.02, while the ratio for the communication services sector rose the most, with a 25.5% increase to 2.06.
The consumer staples sector had the highest median interest coverage ratio among non-investment-grade companies at 3.94, while the utilities sector had the lowest ratio at 1.45.
Debt-to-equity ratios
The median values for total debt as a percentage of equity, or debt-to-equity ratio, among rated US companies in the third quarter were lower than the prior three months. The ratio eased to 85.80 from 86.95 for investment-grade companies and to 114.40 from 118.30 for non-investment-grade companies.
In the third quarter, the utilities sector had the highest median debt-to-equity ratio among investment-grade companies at 137.30 and among non-investment-grade companies at 221.60. The IT sector had the lowest median debt-to-equity ratio among investment-grade companies at 58.20, while the energy sector had the lowest ratio among non-investment-grade companies at 70.70.
For both categories of rated companies, the median debt-to-equity ratio decreased most in the materials sector, dropping over 3% to 68.10 for investment-grade companies and declining 8% to 90.80 for non-investment-grade companies.
The median debt-to-equity ratio for the communication services sector increased the most among investment-grade companies, rising 20.4% to 111.20. Among non-investment-grade companies, the median ratio for the consumer staples sector rose the most, going up 17.5% to 119.60.
