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Interest Coverage Ratios: Assessing Vulnerabilities in Nonfinancial Corporate Credit, Accessible Data
Figure 1. Corporate Debt Outstanding by Maturity
The figure shows the volumes in billions of dollars of nonfinancial corporate loans and bonds outstanding by maturity in the left and right panels, respectively. In each panel, maturities are grouped in six buckets: 2020, 2021, 2022, 2023, 2024 to 2029, and 2030 and beyond. The volume of loans outstanding (left panel) are reported for both fixed-rate loans and floating-rate loans. The total volume of loans outstanding with maturity in 2020 is about one trillion dollars, with at least three quarters of this volume representing floating-rate loans. The total volume of loans with maturity in 2021, 2022, and 2023 are about 500, 600, and 700 billion dollars, respectively, with most of this volume representing floating-rate loans. The total volume of loans with maturities between 2024 and 2029 is slightly below one trillion dollars, with most of it representing floating-rate loans. Loans with maturities in 2030 and beyond are only a very small amount of the total amount outstanding of loans. The volume of bonds outstanding (right panel) are reported for both investment grade bonds and high-yield (junk) plus unrated bonds. Bond volumes with maturities between 2020 and 2023 are similar, somewhat below 500 billion dollars for each year, with most of this volume representing investment grade bonds. The total volume of bonds with maturity between 2024 and 2029 is close to 2.5 trillion dollars, with about 1.5 trillion dollars of it representing investment-grade bonds. The total volume of bonds with maturities in 2030 and beyond is about 1.7 trillion dollars with most of it representing investment-grade debt. The sources for the loans data are Y-14 regulatory reporting, Federal Reserve Financial Accounts of the United States Z.1. and Thompson Reuters. The sources for the bonds data are Mergent FISD and Thomas Reuters Dealscan.
Source: Board of Governors of the Federal Reserve System, FR Y-14 and Statistical Release Z.1, “Financial Accounts of the United States”; Refinitiv, Dealscan
Source: Mergent Inc., Mergent Corporate FISD Daily Feed (FITF); Refinitiv, Dealscan.
Figure 2. Aggregate Interest Rate Coverage Ratio: Bond Downgrades and Debt Growth under the Baseline Scenario
The chart displays the historical series of the aggregate interest coverage ratio for nonfinancial firms between 200 and 2020, followed by the projected paths for this ratio under three scenarios: baseline scenario, baseline scenario with no downgrades, and baseline scenario with low debt growth. The chart shows an interest coverage ratio that declines to its lowest level for the period, slightly below 2.5, during the 2001 recession. Subsequently, the ratio increased to levels around 5 in 2005 and gradually declined to levels around 4 during the 2008-2009 financial crisis, before recovering and reaching levels as high as 7 in 2014, and remaining around levels between 5 and 6 until 2020. For the three analyzed scenarios, the interest coverage ratios decline sharply to levels slightly below 4 in 2021. In both the baseline scenario and the baseline scenario with no downgrades, the ratio recovers in 2022 to levels around 4.5, while in the baseline scenario with low debt growth the ratio recovers to levels somewhat below 5 in 2022.
The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001–November 2001 and December 2007–June 2009.
Note: Interest rate coverage ratio is measured as the ratio of earnings before interest and taxes (EBIT) to interest expense.
Figure 3. Aggregate Interest Rate Coverage Ratio: Bond Downgrades and Debt Growth under the Tail Scenario
The chart displays the historical series of the aggregate interest coverage ratio for nonfinancial firms between 200 and 2020, followed by the projected paths for this ratio under three scenarios: tail scenario, tail scenario with no downgrades, and tail scenario with low debt growth. The chart shows an interest coverage ratio that declines to its lowest level for the period, slightly below 2.5, during the 2001 recession. Subsequently, the ratio increased to levels around 5 in 2005 and gradually declined to levels around 4 during the 2008-2009 financial crisis, before recovering and reaching levels as high as 7 in 2014, and remaining around levels between 5 and 6 until 2020. For the three analyzed scenarios, the interest coverage ratios decline sharply to levels somewhat above 3 in 2021. In both the tail scenario and the tail scenario with no downgrades, the ratio declines further in 2022 to levels around 3, while in the tail scenario with low debt growth the ratio declines to levels slightly above 3 in 2022.
The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001–November 2001 and December 2007–June 2009.
Note: Interest rate coverage ratio is measured as the ratio of earnings before interest and taxes (EBIT) to interest expense.
Figure 4. Distribution of Interest Coverage Ratios in 2019Q1 and 2020Q1
The figure shows a density distribution of interest coverage ratios in the first quarter of 2019 and the first quarter of 2020. Both distributions are centered around three, which is also the approximate median interest coverage ratio specified in loan contract covenants, indicated by a vertical line. The range of the distribution shown is from zero to twelve. There is a notably higher density around three in the first quarter of 2020 as the distribution shifted more leftward. There is also a smaller peak that shifted from around ten in 2019 to around seven in 2020.
Note: The region where the two distributions intersect is depicted in teal. Source: S&P Global, Compustat and Capital IQ.
Figure 5. Fraction of Debt and Firms with Interest Coverage Ratios below a Threshold
The figure shows two panels of time series: a left panel showing the percent of debt with interest coverage ratios less than a given threshold, and the right panel showing the percent of firms with interest coverage ratios less than a given thresholds, plotted from 2000 to 2020Q1. Each panel has two lines: the first using a threshold of one, and the second using a threshold based on the sector median of loan contract covenants for each firm. The two lines in each panel have very similar movements, with the sector median metric generally about fifteen percentage points higher. The fraction of firms is also generally higher than the fraction of debt. The measure of debt with ICR less than one peaks at 25 percent in the early 2000s, then trends down to below ten percent in 2019. The percent of firms with ICR less than one peaks at around 35 percent in the early 2000s, then has a minimum just below 20 around 2012. The fraction of firms steadily rises back up from 2012 to be about 27 percent in 2020Q1. Both panels show a notable upward tick from the end of 2018 to 2020Q1.
Figure 6. Quantile Regression Estimation Results
The figure shows two panels of time series: the results of quantile regressions for the baseline forecast scenario, and the results of the quantile regressions for the tail forecast scenario. Each panel has two lines, a line for the median ICR and a line for the 25th percentile ICR, and the X-axis ranges from 2000 to 2022. The median lines and the 25th percentile lines are the same in each panel up until 2020Q2, the start of the forecast period. The historical median line ranges from just below two to just below four, while the historical 25th percentile line ranges from about 0.5 to just over one. In the baseline forecast panel, the median line dips from about 3 to just below 2 over the first few quarters of the forecast, then rebounds to stabilize at about 2.5. The 25th percentile line dips from just below 0.5 to just below 0, then stabilizes at just above 0. In the tail forecast, the median line decline from around 3 to less than 1.5, then trends upwards to finish at about 2 in 2022Q4. The 25th percentile line declines from just above 0 to somewhat lower than negative 0.5, then trends upwards to finish just below 0.
The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001–November 2001 and December 2007–June 2009.