Accessible Version
Monetary Policy Tightening and Debt Servicing Costs of Nonfinancial Companies, Accessible Data
Figure 1. Cumulative Changes of NFC Borrowing Costs: Current Cycle
Line chart shows the cumulative increases in quarterly average policy rates (black dots), rates on new NFC bank loans (yellow dotted lines), 5-year yields on BBB-rated corporate bonds (blue solid lines), and annualized interest expense scaled by total debt (interest cost, red dashed lines) for the median firm in the United States, United Kingdom, Canada and the Euro area since the beginning of monetary tightening. The vertical axes range from a cumulative interest rate increase of -1 to 7 percentage points. The horizontal axes range from 2021:Q3 through 2023:Q1. What is evident in this figure is that passthrough to new borrowing costs as reflected by new bank loan rates and corporate bond yields has increased significantly more quickly than interest costs.
Note: Median NFC Interest Cost is annualized quarterly interest expense to total debt. U.S. New Bank Loan Rates are based on posted prime loan rates.
Source: Federal Reserve H. 15, Bank of England, Bank of Canada, ECB Statistical Data Warehouse, S&P Capital IQ, Bloomberg, Board staff calculations.
Figure 2. Cumulative Change of NFC Interest Cost: Historical Comparison
Line chart shows cumulative increases in quarterly median NFC interest costs (red dashed lines) in the United States, United Kingdom, Canada and the Euro area since the beginning of monetary tightening compared to predicted NFC Interest Costs (blue solid lines and shaded areas) are obtained by multiplying the quarterly cumulative increase in policy rates during the current tightening cycle by the quarterly mean and 95% confidence interval of historical firm-level passthrough estimates. We use historical tightening cycles that began in 2004:Q2 and 2015:Q4 for the U.S., 2003:Q3 and 2006:Q3 for the U.K., 2005:Q3 and 2017:Q3 for Canada, and 2005:Q4 for the Euro area. The vertical axes range from a cumulative interest rate increase of -1 to 6 percentage points. The horizontal axes range from 2021:Q3 through 2023:Q1. What is evident from this figure is that monetary policy passthrough to NFC debt servicing costs is comparable to, if not slightly faster than, that over recent historical experience.
Note: Predicted NFC Interest Costs are obtained by multiplying the quarterly cumulative increase in policy rates during the current tightening cycle by the quarterly mean and 95% confidence interval of historical firm-level passthrough estimates through each quarter of tightening. We use historical tightening cycles that began in 2004:Q2 and 2015:Q4 for the U.S., 2003:Q3 and 2006:Q3 for the U.K., 2005:Q3 and 2016:Q3 for Canada, and 2005:Q4 for the Euro area. Median NFC Interest Cost is annualized quarterly interest expense to total debt. Shaded areas represent NFC Interest Cost implied by 95% confidence interval of historical firm-level passthrough.
Source: Bloomberg; S&P Capital IQ; Board Staff Caclulations.
Figure 3. Cumulative Change in Median Interest Coverage Ratio
Line chart shows the cumulative change in the median interest coverage ratio, the ratio of ebitda to interest expense, for terciles of firms broken up by passthrough across the United States, United Kingdom, Canada, and the Euro Area. The vertical axis ranges between negative 10 and positive 10 and the horizontal axis ranges from the first quarter of tightening by region to 2023:Q1. The path of the cumulative change lines clearly displays a decline in the interest coverage ratio for all terciles across all regions since the start of tightening. This tightening has been stronger for firms that have had higher passthrough (red solid lines), although this relationship does not hold for Canada who has all lines trending in unison.
Note: Interest coverage ratio is calculated as EBITDA/Interest Expense.
Source: S&P Capital IQ, Bloomberg, Board staff calculations.
Figure 4. Cash Holdings
Line chart shows the ratio of firm cash and short-term investments to total assets since 2002:Q1 to 2023:Q1 for the United States, United Kingdom, Canada, and the Euro Area by the median (black solid lines), bottom quartile (blue dotted lines), and top quartile (red dashed lines) firms. There are also shaded regions that indicate periods of tightening monetary policy by each regions central bank. The figure reveals the large increase in firm cash following the pandemic support as well as the declining levels thereafter. Cash levels have mostly returned to pre pandemic levels.
Note: Last quarter is Q1 2023. Cash holdings is defined as the ratio of cash and short term investments to assets. Shaded regions are periods of policy rate increases. United States: 2004:Q2-2006:Q2, 2015:Q4-2018:Q4, and 2022:Q1-2023:Q1. United Kingdom: 2003:Q3-2005:Q2, 2006:Q3-2008:Q1, and 2021:Q4-2023:Q1. Canada: 2005:Q3-2007:Q4, 2016:Q3-2018:Q3, and 2022:Q1-2023:Q1. Euro area: 2005:Q4-2007:Q3 and 2022:Q3-2023:Q1.
Source: S&P Capital IQ.
Figure 5. Percent of Bonds Outstanding by Quarter
Bar/Line Combo Chart shows the percent of bonds maturing (blue bars) in each quarter to the realized (red solid lines) and Bloomberg forecasted (red dotted lines) monetary policy rates for the United States, United Kingdom, Canada, and the Euro Area. The horizontal axis is quarterly and reaches from 2023:Q2 to 2025:Q4. The percent of bonds maturing in each quarter are shown as blue bars scaled by the right axis that ranges between 0 and 6 percent. The actual central bank policy rate is given by a solid red line connected to a dotted red line that indicates the Bloomberg consensus forecast, the forecast continues to 2025 Q1 after which it stops. The bars of the bonds are relatively flat while the forecasted policy rates decline through 2024 but will remain higher than their pre-tightening levels.
Source: Bloomberg, Board staff calculations