Corporate America Is Choking on Debt

After tapping the bond market at a record-shattering pace in recent months, Corporate America is more indebted today than ever before.
And while much of that fresh cash -- more than $1.6 trillion in total -- helped scores of companies stay afloat during the pandemic lockdown, it now threatens to slow the economic recovery that was already showing signs of sputtering.
Many companies will have to divert even more cash to repaying these obligations at the same time that their profits sink, leaving them with less to spend on expanding payrolls or upgrading facilities in months ahead.
But in a sign of just how pronounced the borrowing overhang has become, the average junk-rated company (BAD Credit Companies) had debt levels relative to earnings that were so high in the middle of the year, according to a new analysis by Bloomberg Intelligence, that they almost would have tripped do-not-touch alerts from banking regulators a few years ago.
Those warnings back then only applied to a handful of borrowers. Had regulators not opted to drop these warnings, they could today apply to far more.
With short-term interest rates having fallen to near-zero levels, borrowing is cheaper for most companies than it was just a year ago.
Average yields (the interest a company pays to investors) on U.S. investment-grade corporate bonds touched all time lows of 1.82% earlier this month, and are still hovering near those levels, according to Bloomberg Barclays index data.

But companies still have lower earnings relative to their required interest payments. The ratio of their earnings before interest, tax, depreciation and amortization to their interest expense, known as their interest coverage, fell to 5.8 in the second quarter for investment-grade companies, compared with a 20-year average closer to 7. The June 2020 level was the lowest since 2003.
For junk-rated companies, the interest coverage ratio fell to 2.3 in June, also the lowest since 2003.

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