Interest coverage expected to drop for low-rated corporate issuers

Interest coverage, defined as the ratio of earnings before interest, taxes, depreciation and amortization less capital expenditures to interest expense, is expected to decline for 305 U.S. and Canadian corporate bond issuers rated B3, according to Moody's Investors Service. At the end of this year, it forecasts interest coverage will drop to 0.91 times from 1.32 times at the end of 2022. Moody's noted that many of those borrowers have private equity owners.

The rating agency based its 2023 projection on the current 5.25% to 5.5% federal funds rate, and 2022 debt balances and EBITDA.

The number of B3-rated issuers with interest coverage below 1 time is expected to jump to 188 at the end of 2023 from December's 89. Moody's expects those with interest coverage above 1.5 times to fall to 32 from 115.

The option-adjusted spread for B-rated corporate issuers was 366 basis points at the end of July, the narrowest of the year. The OAS has fallen from 489 basis points at the end of 2022.