US Corporate Debt Outpaces Economic Growth

The value of debt held by U.S. corporations is now growing faster than the economy, and businesses are struggling to make their interest payments, according to a new report from the Institute of International Finance (IIF).

Reports in Reuters on Thursday (Jan. 10) said IIF data shows that U.S. companies’ interest coverage ratio — the ratio of interest expenses to pre-tax, pre-interest earnings — has been on the decline since 2014, with firms in real estate reporting the lowest ratios of less than two.

“That means those companies are earning less than two times the cost of their interest payments,” Reuters stated, “only one of many liabilities on a corporate balance sheet.”

Energy and healthcare companies are also showing low-interest coverage ratios, reports noted.

The Federal Reserve‘s interest rate increases, combined with ballooning corporate debt in the country, are adding to the pressure of interest payments for corporates. The IIF’s report warned that corporate debt among non-financial U.S. companies is now 4 percentage points higher than at the beginning of the 2008 financial crisis, and now makes up 46 percent of total gross domestic product (GDP).

The IIF’s warning follows analysis from CNBC in November that warned the $9 trillion in debt currently held by U.S. corporates is causing rising concerns as it “teeters” between investment grate and junk.

“There is angst in the marketplace. It’s not misplaced at all,” said Michael Temple, Amundi Pioneer U.S. director of corporate credit research, in an interview with CNBC at the time. “But are we at that moment where this thing blows sky high? I would think that we’re not there yet. That’s not to say that we don’t get there at some point over the next 12 to 18 months as rates continue to move higher.”

Economists have been sounding the alarm over corporate debt levels in the country for several months now. Last year, S&P Global raised concerns over record-low cash-to-debt ratios of 12 percent for 2017.