## Figure 1.10. Debt Service, Interest Coverage Ratios, and Vulnerability to Higher Interest Rates

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**Canonical URL:** [Figure 1.10. Debt Service, Interest Coverage Ratios, and Vulnerability to Higher Interest Rates](https://www.imf.org/-/media/files/publications/gfsr/2017/april/chapter-1/figure1-10.pdf)

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### 1. Corporate Debt Service and Interest Rates
- The debt service burden for the corporate sector as a whole has risen strikingly despite low rates.
- Chart annotation: Debt service ratio (percent of income, right scale) and prime lending rate (percent, left scale) are presented together to show the burden relative to income and prevailing lending costs.
- Annotation: 2016 calculations reflect the first three quarters of the year, wherever full year estimates are not available.

### 2. Evolution of the Distribution of ICRs across Firms by Size (Ratio of EBIT to interest payments)
- Interest coverage ratios have undergone a corresponding fall at the firm level, particularly for smaller companies.
- Distribution highlights include categories: Smallest 25 percent by assets; Smallest 5 percent by assets.
- Vulnerability categories shown: Weak (ICR < 1); Vulnerable (1 ≤ ICR < 2).

### 3. High Yield Option-Adjusted Corporate Spread and Average Interest Coverage Ratios across Firms
- Market pricing of corporate risk has decoupled from the decline in interest coverage ratios.
- Indicators combined: High-yield spreads (basis points, left scale) and Mean ICR (ratio, right scale, inverted).

### 4. Average Interest Coverage Ratio (Ratio of EBIT to interest payments)
- Higher financing costs could significantly weaken firms’ interest coverage ratios.
- Time series spans multiple years including marker years such as 1996, 1997, 1998, 1999, 2000, and through 2016.

### 5. Percentage of “Challenged” Firms (Percent of total assets)
- A growing set of firms is at risk of default as the percentage of “challenged” firms increases.
- Threshold referenced for “challenged” firms: ICR = 2.0x.
- Scenario annotation: ($3.9 trillion) is noted in the figure context.

### 6. Evolution of “Challenged” Firms, by Sector (Share of total firms with ICR < 2)
- The share of “challenged” firms has risen in the energy, real estate, and utilities sectors.
- Sector labels shown: Energy; Consumer discretionary; Information technology; Real estate; Industrials; Others; Utilities; Materials.

*Sources: Bank for International Settlements; Bloomberg L.P.; S&P Capital IQ; and IMF staff estimates.
Note: 2016 calculations reflect the first three quarters of the year, wherever full year estimates are not available. Shaded areas indicate economic recessions. EBIT = earnings before interest and taxes; ICR = interest coverage ratio.*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2017/april/chapter-1/figure1-10.pdf_