Leveraged Loan Issuers Show Resilient Earnings Growth Amid AI Spending Concerns

Leveraged borrowers delivered another quarter of resilient earnings strength, keeping a lid on credit pressure even as the financing environment grows costlier. According to data from GN markets/earnings (en-US), revenue across the Morningstar LSTA US Leveraged Loan Index grew by 8% and EBITDA by 9%, matching the growth rates recorded in the first quarter. These metrics represent the highest readings since 2022, outpacing the 6% revenue and 4% EBITDA growth seen in the second quarter of 2025.

The results are based on 165 issuers that file their results publicly, representing 12% of the index by both issuer count and par amount of loans, which totals $186 billion. This consistent performance indicates that the earnings engine is continuing to propel borrowers ahead of potential credit strains, providing a buffer against the higher costs of capital.

Leverage and Coverage Ratios Improve

Average leverage decreased to 4.85x in the second quarter, down from 5.01x in the first quarter and 5.08x a year ago. On a weighted average basis, leverage was up just four basis points sequentially to 5.23x, but down 10 basis points year to year. Strong earnings also supported key coverage ratios, with earnings covering interest expense by 4.95x on average. This is up five basis points sequentially and 44 basis points year to year, marking the highest coverage reading since the first quarter of 2023.

After accounting for capital expenditures, which is a key credit risk as companies adapt to AI and other disruptions, cash flow coverage of interest expense remained robust. On an average basis, this metric stood at 3.49x, up two basis points sequentially and 18 basis points from the second quarter of 2025. On a weighted average basis, it was 3.22x, down six basis points sequentially but up 26 basis points from the same period last year.

Outer Edge Borrowers Remain Stable

Resilient earnings are keeping most borrowers away from the credit precipice. The share of borrowers with "outer edge" leverage levels, defined as debt-to-EBITDA of more than 7x, held steady at 17% of the pool. This is the same as in the first quarter and the year-ago quarter. Similarly, 22% of the pool had cash-flow coverage of less than 1.5x, unchanged from the first quarter and up from 20% last year. During the pandemic, these outer edge shares peaked at 35% for leverage and 29% for cash flow coverage.

Earnings strength was consistent across the credit quality ladder. Excluding the finance, energy, and hyperscaler sectors, BofA Global Research tracked 6.1% year-over-year earnings growth for "core" investment-grade bond and loan issuers. This is stronger than the growth seen in the first quarter, with revenue growth exceeding 7%. The weakest sectors in terms of performance were health care, consumer products, and transportation.