NY Fed, Report: What’s New with Corporate Leverage?

“Leverage allows nonfinancial firms to invest and grow, but high levels of corporate leverage increase the probability of downgrades and defaults. So far, nonfinancial firms have managed to lengthen the maturity of their bonds outstanding through the current tightening cycle, decreasing the risks of refinancing down the road. From the comparison to previous tightening cycles we learn that net leverage of investment-grade firms, which represent 65 percent of all sales by rated firms in the U.S., has been declining noticeably, suggesting that investment-grade firms may have relatively healthy balance sheets currently. Nevertheless, the large fraction of issuers at the lower end of the investment-grade spectrum poses a continuing financial vulnerability and only time will tell how these firms will adjust to the new interest rate environment.”