Leveraged loan issuers demonstrated resilient earnings strength in the second quarter, maintaining high growth rates despite mounting concerns over artificial intelligence-driven capital expenditures. According to data from the Morningstar LSTA US Leveraged Loan Index, revenue for the sampled borrowers grew 8% and EBITDA expanded 9%, repeating the growth velocities seen in the first quarter. These metrics represent the highest readings since 2022, signaling that the financing environment, while costlier, has not yet eroded the fundamental profitability of highly leveraged firms.

Market Context

The broader credit market has been watching closely for signs of debt-servicing stress as interest rates remain elevated. However, the Q2 results indicate that borrowers are largely staying ahead of credit strains. Average leverage ratios declined to 4.85x in Q2, down from 5.01x in Q1 and 5.08x a year ago. On a weighted average basis, leverage edged up just four basis points sequentially to 5.23x, but remained 10 basis points lower year-over-year. This stability contrasts with earlier fears that rising costs and AI investment cycles would trigger a wave of downgrades.

Analysis

The persistent earnings engine is acting as a buffer against potential credit defaults. Interest coverage ratios, a critical metric for lenders, improved significantly. On an average basis, earnings covered interest expense by 4.95x, marking the highest reading since Q1 2023. This represents a sequential increase of five basis points and a year-over-year gain of 44 basis points. Even after accounting for capital expenditures—a key risk factor as companies scramble to adapt to AI disruptions—cash flow coverage of interest expense rose to 3.49x on an average basis, up 18 basis points from Q2 2025.

BofA Global Research noted that earnings strength was consistent across the credit quality spectrum. Excluding finance, energy, and hyperscaler sectors, "core" investment-grade bond and loan issuers posted 6.1% year-over-year earnings growth, stronger than in Q1. However, sector divergence is emerging, with health care, consumer products, and transportation identified as the weakest performers. Investors remain vigilant for signs of stress in borrowers with high leverage or low cash flow coverage, though these groups have not yet expanded significantly.

Key Numbers

- Revenue growth for sampled issuers: 8% (repeating Q1 rate)

- EBITDA growth for sampled issuers: 9% (repeating Q1 rate)

- Average leverage ratio: 4.85x (down from 5.01x in Q1)

- Weighted average leverage: 5.23x (up 4 bps sequentially, down 10 bps YoY)

- Average interest coverage ratio: 4.95x (highest since Q1 2023)

- Cash flow coverage of interest (after capex): 3.49x (up 18 bps YoY)

- Borrowers with >7x leverage: 17% of pool (unchanged from Q1)

- Borrowers with <1.5x cash flow coverage: 22% of pool (up from 20% last year)

- "Core" IG issuer earnings growth (excl. finance/energy/hyperscalers): 6.1% YoY

What to Watch

Traders should monitor upcoming Federal Reserve policy decisions for signals on the trajectory of interest rates, which directly impact debt-servicing costs for leveraged borrowers. Attention must also be paid to Q3 earnings reports from high-leverage sectors, specifically health care, consumer products, and transportation, which analysts have flagged as the weakest performers. Key credit metrics to watch include the weighted average leverage ratio, which sits at 5.23x, and the percentage of borrowers with cash flow coverage below 1.5x, currently at 22% of the pool. A sustained rise in these stress indicators could signal a shift from the current resilient environment to one of increased default risk.