How higher Fed rates for longer could squeeze ability of big companies to pay interest on debt

The ability of big U.S. companies to pay interest on their debt could sink to the lowest level in two decades, if the Federal Reserve opts to keep interest rates higher for longer, according to BofA Global.

Major corporations, like homeowners, embarked on a borrowing blitz during the pandemic when the Fed cut its policy rate to almost zero in a bid to thwart an economic calamity from unfolding. Specifically, the BofA team looked at estimated interest coverage ratios for corporations with investment-grade credit ratings should the Fed keep its policy rate elevated through the end of 2025.

“Of course, the impact on the coverage ratio will depend on how long rates remain high,” the BofA team led by Yuri Seliger wrote, in a Tuesday client note.

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