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Lucyna Gόrnicka
Senior Economist · Economics, Prices & Costs
Maciej Grodzicki
Thore Kockerols
Chloe Larkou

Corporate debt service and rollover risks in an environment of higher interest rates

Prepared by Lucyna Górnicka, Maciej Grodzicki, Thore Kockerols and Chloe Larkou

Published as part of the Financial Stability Review, May 2024.

The rapid increase in interest rates could weaken the ability of firms to service and roll over their debt and, consequently, worsen the outlook for bank asset quality. Since the pandemic, several factors have helped to keep euro area corporate sector profitability remarkably resilient to shocks. First, firms managed on aggregate to improve their revenues as economic activity rebounded after the pandemic. Second, pent-up demand made it easier for them to pass rising energy and input costs (affected by supply bottlenecks and Russia’s war against Ukraine) through to consumers. After the ECB started raising its policy rates in the middle of 2022, however, firms started facing higher costs to service their debts, initially on floating-rate debt and later also on their fixed-rate debt. This box combines firm-level balance sheet data with loan-level data to assess the joint impact of resilient post-pandemic profitability and higher financing costs on the debt servicing capacity of euro area firms. As a measure of debt servicing capacity, the box uses an adjusted interest coverage ratio (ICR).[1] As the financial data of non-listed euro area firms are typically released with a long lag, firms’ earnings in 2023 are estimated using sector and country aggregate earnings growth rates. Interest payments are estimated based on actual lending rates available at the individual loan level.

The estimated interest burdens of euro area firms may be signalling a mild increase in either loan defaults or restructurings, or both. Most firms are expected to continue servicing their debts without difficulty, despite higher interest rates. This can be attributed to low starting levels of interest payable, high cash buffers that were bolstered during the pandemic or a sizeable increase in earnings since 2021. The share of loans to firms assessed to be unable to meet their interest payments with earnings and accumulated cash – meaning they have an ICR below 1 – is estimated to have risen from about 7.9% to 8.4% since 2021 (Chart A, panel a).[2] A further 8.1% of loans have been granted to firms which could face challenges in making principal repayments, as they have small earnings buffers above their contractual interest payments (ICRs of between 1 and 2.5). Since this renders firms vulnerable to revenue or input cost shocks, some of them may need their debt to be reprofiled to remain solvent.

Chart A

Corporate interest burdens have increased more in sectors and countries most exposed to the effects of higher interest rates

a) Distribution of loans to non-financial firms with interest coverage ratios below 10

b) Change in the share of loans to firms projected to fail to meet interest payments from earnings and cash balances


(end-2023 vs end-2021, percentage points)

Sources: ECB (AnaCredit), Bloomberg Finance L.P., Eurostat, BvD Electronic Publishing GmbH – a Moody’s Analytics company and ECB calculations.
Notes: The interest coverage ratio (ICR) is defined as earnings before interest, tax, depreciation and amortisation plus cash and equivalents, divided by annual interest payments. The latest available data on earnings refer to 2021; projections for 2023 are obtained by indexing earnings at the NACE-2 sector level in line with sectoral turnover aggregates reported by Eurostat. Annual interest payments are estimated from loan-level data, taking into account the increase in interest rates due to indexation to a floating-rate index. Where a figure for depreciation and amortisation is not available, it is assumed to be zero. Data cover about 461,000 firms active in 2019 and 2021 which had loans outstanding at the end of 2023. Panel a: the distribution of the ICR has been censored at 10. Panel b: the heatmap shows changes in the share of total outstanding firm loans with an ICR<1, broken down by economic sector and country. Economic activity classification in accordance with NACE Rev.1. Sector L refers to real estate activities, sectors D+E refer to Electricity, Gas, Water, sector F refers to Construction, sector H refers to Transporting and Storage, sector C refers to Manufacturing, sectors M+N refer to Professional activities, sector G refers to Wholesale and Retail Trade, sector I refers to Accommodation and Food, sector J refers to Information and Communication. Countries sorted by increasing share of fixed-rate loans. Grey areas indicate country-economic activity pairs for which data on fewer than 70 firms are available. Some euro area countries are not presented due to limited availability of corporate financial data.

The impact of higher debt service costs has been disproportionately strong in the real estate sector and in countries where loans are mostly contracted with floating interest rates. The larger increase in the interest payable of real estate firms compared with other sectors reflects the larger negative impact of weaker demand (amid higher mortgage interest rates) on their net revenues (Chart A, panel b). Interest burdens have also increased more strongly in several smaller euro area countries where floating-rate lending is prevalent, contrasting with milder increases in fixed-rate countries such as Germany and France.

Chart B

Pressure on refinancing corporate loans is expected to ease in the coming years, but banks have been slow to recognise the impact of higher debt service costs on loan quality

a) Distribution of loans to non-financial firms, by interest coverage with earnings and cash balances and by next loan refinancing date

b) Share of outstanding loans within ICR buckets, by forbearance, default and Stage 2 status



Sources: ECB (AnaCredit), Bloomberg Finance L.P., Eurostat, BvD Electronic Publishing GmbH – a Moody’s Analytics company and ECB calculations.
Notes: See Notes to Chart A. Panel b: “Forbearance” refers to refinanced loans or loans with modified terms and conditions. “Default” refers to loans that are deemed unlikely to pay or that are more than 90/180 days past due. “Stage 2” refers to loans for which credit risk has increased significantly since initial recognition, but which are not impaired. The status categories are not mutually exclusive, meaning that shares of outstanding loans by status are not additive.

Some vulnerable firms may benefit from refinancing in a more favourable environment, if market rates fall as expected. Even if vulnerable firms manage to continue servicing their loans, a low interest coverage ratio raises refinancing risk because banks need to re-assess the creditworthiness of the borrower before agreeing to the terms of the new loan. The cohorts of firms which are due to refinance their loans after 2024 are less vulnerable than those which have secured financing for shorter terms (Chart B, panel a), as they are expected to benefit from gradually falling interest rates.

Banks should recognise credit distress promptly and offer viable solutions to firms which struggle to service their debt. Lower interest coverage ratios are usually associated with higher shares of defaulted and underperforming (Stage 2) loans. However, even among firms with low interest coverage ratios, more than half of the bank loans have not been restructured and remain performing (Chart B, panel b). Weak interest coverage is likely to lead to trade-offs for banks between offering forbearance solutions and enforcing the loans, where the latter would likely lead to more abrupt credit loss. It is important that such forbearance solutions are viable for the customer and that their financial implications are accurately recognised in bank financial statements. Otherwise, unsustainable forbearance may lead to higher credit losses in the long run.

  1. We define the interest coverage ratio as earnings before interest, depreciation and amortisation (EBITDA) plus cash and cash equivalents, divided by annual interest payments. This indicator measures the ability of firms to meet interest payments in the next 12 months and does not capture firms’ vulnerability over a longer horizon. The ICR decreases when a firm’s capacity to service its debt weakens. The ICR is correlated with other measures of a firm’s financial distress; see the box entitled “Corporate vulnerabilities and the risks of lower growth and higher rates”, Financial Stability Review, ECB, November 2023. Firms that cannot service their debt may adjust by reducing investment outlays or personnel costs, or selling assets, meaning that an ICR below 1 does not necessarily lead to them defaulting on their debt.

  2. The high number of firms with an ICR below 0 already pre-pandemic is consistent with other studies that find a comparable share of illiquid firms (i.e. those not able to cover financial expenses with cash flows and cash) based on the Orbis database. See, for example, Kalemli-Ozcan, S., Gourinchas, P.-E., Penciakova, V. and Sander, N., “COVID-19 and SME Failures”, IMF Working Papers, International Monetary Fund, 2020. Illiquid firms might still continue operating thanks to access to credit and debt restructuring, for instance.