US companies’ debt cushion smallest since Q1 2021 :BofA By Reuters

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<p>By Matt Tracy</p>
<p>(Reuters) – Rising borrowing costs made a slight dent in U.S. companies’ ability to make interest payments on their debt in the third quarter despite a boost in earnings, according to BofA Global Research.</p>
<p>High-grade corporate borrowers’ average interest coverage ratio – how many times over a company’s income covers their interest payments – fell to 10.71x last quarter from 11.24x in the second quarter, the Tuesday report’s authors found based on preliminary data for 75% of companies in BofA’s sample that tracks public debt issuers.</p>
<p>Coverage ratios hit their lowest since the first quarter of 2021, when companies in many sectors struggled with pandemic-related supply cost increases and weak demand.</p>
<p>But the most recent decline came at the same time that company earnings grew. Median year-over-year earnings growth jumped 4.2% in the third quarter, from 0.6% in the second quarter, according to BofA Global.</p>
<p>Borrowers’ weaker interest coverage stems from higher borrowing costs, the report noted. The median cost of debt increased to 3.77% in the third quarter from the second quarter – its highest since the fourth quarter of 2018. Companies’ gross debt was little changed, but net debt growth turned negative for the first time since the third quarter of 2021.</p>
<p>This has led to slightly improved leverage on companies’ balance sheets, as higher-rated borrowers used their earnings to pay down some of their outstanding debt and ease pressure on refinancing costs.</p>
<p>“(Investment-grade) issuers continued to manage their balance sheets conservatively in 3Q,” wrote Yuri Seliger, credit strategist at BofA Global. </p>
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