Even with inflationary war dynamics in the mix in March, the earnings engine for leveraged borrowers fired on all cylinders over the first three months this year, and key credit metrics (leverage, coverage) improved. In fact, EBITDA growth surged 9% for LCD’s running sample of leveraged loan borrowers, the highest since Q3 2022. Revenues grew 8%, a high since Q4 2022.
Positive trend
That leveraged loan cohort has maintained positive earnings and revenue growth since 2021. For earnings, though, growth rates were more modest in recent years, averaging 2-5% in the quarters from 2023-2025.
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LCD’s statistics are based on 160 issuers in the Morningstar LSTA US Leveraged Loan Index that file their results publicly. These issuers represent $184 billion of par value loans in the index, or 14% by issuer count and 12% by amount.
Leverage trends have been glacial since a drop from pandemic-era peaks. Average leverage dipped to 5.01x, from 5.04x over the last six months of 2025. It was 6.41x at the high in 2020, and the quarterly average since 2021 is 5.05x.
Coverage metrics improved as well. Interest coverage rose to 4.90x, from 4.67x in the fourth quarter. That’s a high since the first quarter of 2023, if still down more than a full turn from readings just shy of 6x in 2022.
Coverage key
That extra coverage is key for many issuers, as capital spending rises to account for a rapidly shifting technology landscape and global supply chain. After accounting for capital expenditure, issuers still generated enough cash flow to cover interest expenses by 3.47x, up from 3.36x in the fourth quarter. However, that measure was higher as recently as Q4 2024 (3.65x).
Notably, some issuers are slipping closer to a credit precipice, even as the asset class displays resilience. The percentage of “outer edge” issuers in the sample — those with leverage readings of more than 7x and/or cash flow coverage of less than 1.5x — ticked a percentage point higher in the latest quarter, to 17% and 22%, respectively.
Those readings have trended higher from 14% and 18% in the final quarter of 2024. However, they remain well below the crisis readings in 2020, when 35% of the sample had outer-edge leverage and 29% operated with bone-thin cash flow coverage.
Leveled-up earnings for leveraged borrowers early in 2026 track with performance above the investment-grade line. BofA Global Research recently pegged median IG earnings growth at 8.1% in the first quarter, a high since 2021. One notable takeaway at the shop was a large draw on liquidity (cash balances dropped more than 5%, versus a more typical seasonal draw of less than 1%), against a 5%-plus surge in capital spending growth (from 1.7% in the fourth quarter).
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This article originally appeared on PitchBook News