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S&P: Stress intensifies for leveraged companies as borrowing hits peak

Companies that took advantage of lower interest rates for years following the financial crisis may soon be in for a reckoning, especially those in sectors that are more vulnerable to pricing pressure, according to a new report from S&P Global Ratings.

"As a result ... of this debt binge, the median debt level among rated U.S. corporate borrowers now exceeds comparable metrics immediately prior to the most recent financial crisis," the Oct. 9 report said.

Companies generally have been able to come up with cash to service their debt, but the picture is significantly different among those rated investment grade and speculative grade.

Investment-grade companies took advantage of their strong credit profiles to refinance at historically low rates and push out their debt maturity, S&P said.

Speculative grade companies, which have been able to tap capital markets because investors were looking for higher yields, have suffered "modest deterioration," in their ability to service their debt, the report noted.

Companies in the commodities sector, including oil and gas, and metals and mining, that were once showing significant increases in leverage, were able to improve their metrics as prices rebounded. The mantle of most-stressed industry has passed to retail, S&P said, with non-investment grade retailers experiencing problems tapping capital markets. Changing consumer preferences and the disruptive effects of technology continue to put pressure on an industry with high leverage, the report said.

Further economic stress, including from the U.S.-China trade dispute and other geopolitical tensions at a time when the Federal Reserve continues to raise rates, could affect funding liquidity, S&P noted. If corporate loan buyers become more risk-averse, remaining lenders may become more discriminating about which companies they will lend to.

Even if investors are still interested in lower-grade, higher yielding assets, rising interest rates would lead to higher funding costs, making it tougher for companies that are more speculative grade, the report said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.