Junk Market Flashes Warning as Rates Seen Staying High
- Interest coverage ratios have deteriorated since hikes began
- US leveraged-loan default rate has climbed to 6.22%, TD says
The Marriner S. Eccles Federal Reserve building in Washington, DC.
Photographer: Stefani Reynolds/BloombergThis article is for subscribers only.
Junk-rated US companies have seen their interest costs rise after the Federal Reserve’s rate-hike campaign, but profits haven’t kept up, putting a squeeze on finances and underscoring a key risk for investors in high-yield debt as the trend persists.
The ratio between companies’ earnings and their interest expense has fallen to the lowest level since the pandemic, signaling they have less income to service their debt. The so-called debt-service coverage ratio averaged just 3.5 times for the median company in the leveraged-loan universe at the end of September, according to Torsten Slok, chief economist at Apollo Global Management, down from more than 5 times a year earlier.