NEW YORK, Jan 9 (Reuters) - U.S. non-financial firms are increasingly having difficultly earning enough to make interest payments on their debt, which is expanding faster than the economy, according to a report from the Institute of International Finance.
While Federal Reserve officials acknowledge the possibility of a pause in monetary policy tightening this year, U.S. companies have already begun to have trouble servicing their debt. The ratio of a firm’s interest expenses to earnings before interest and tax - the so-called interest coverage ratio - has declined across non-bank firms since 2014.
The median interest coverage ratio is lowest in the real estate, energy and healthcare sectors. Real estate looks to be the most vulnerable, with about 50 percent of companies sporting an interest coverage ratio lower than two. That means those companies are earning less than two times the cost of their interest payments, only one of many liabilities on a corporate balance sheet.
Interest expenses have increased because of ballooning corporate debt loads in addition to Federal Reserve interest rate hikes. U.S. non-financial corporate business debt is 46 percent of gross domestic product, and is currently 4 percentage points higher than it was at the onset of the 2008 financial crisis, according to the IIF.
Reporting by Kate Duguid; Editing by Lisa Shumaker