Board of Governors of the Federal Reserve System

Figure 1: Interest Coverage Ratios over Time

Figure 1 displays the variation in interest coverage ratios over time. Panel A shows that the aggregate ICR has fluctuated between 2 and 6 since 1970, and tends to decrease during recessions. Panel A also shows that the difference between firms with high and low ICRs, as measured by HML ICR, has fluctuated between 6 and 20 percent. Interestingly, this difference has widened persistently from levels around 5 in the early 1990s to around 19 percent in 2015, suggesting increased dispersion in ICRs over time. As in the case of the aggregate ICR, the HML ICR tends to decline during recessions. Panel B of Figure 1 shows the evolution of the fraction of debt risk over time, measured for levels of ICR less than 1 and between 1 and 2. Both fractions show a similar pattern: the fraction of debt at risk tends to increase during recessions. Additionally, there is a large variability in the dispersion of ICRs, as the fraction of debt of firms with ICR less than 2 has fluctuated between 20 and 50 percent over time. Panel C of Figure 1 shows the evolution over time of ICRs across industries, highlighting significant differences in the variability and cyclicality of these ICRs. While the ICR in sectors such as Communications tends to be stable over time, the ICR of sectors such as Oil Mining is very volatile. Variation across industries is also suggested by the correlations of the fraction of debt at risk with the output gap in the last column of Table 1; this fraction tends to be procyclical in sectors such as Electricity, and countercyclical for Services.

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Figure 2: Interest Coverage Ratios and Default Rates

Figure 2 displays the differences across sectors for the predicted critical ICR levels using default rates of 1.5 percent and 3 percent. For the nonfinancial corporate sector (All), an ICR around 3.4 is associated with a default rate of 1.5 percent and an ICR around 1.7 is associated with a default probability of 3 percent. The corresponding ICR levels for Communications are around 3.3 and 2.8, respectively, and for Retail are around 5.1 and 2.7, respectively.

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Figure 3: Corporate Debt Vulnerability Index

The figure plots the EBP of Gilchrist and Zakrajsek (2012), the Chicago−Fed National Conditions Index, and our Corporate Debt Vulnerability Index. Positive (negative) values of the indices indicate tighter (looser) financial conditions. Shaded areas denote NBER recessions. The three indices display a very strong procyclical pattern since the 1980s, with particularly high levels in the late 1980s and in the Great Recession.

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