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LME Perspectives: Interest Coverage and Leverage Statistics Provide Best Clues Among Financial Statistics for Future LME Risk

By: Jared Muroff

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✨ Summary by AI at Octus
The analysis suggests that trailing-12-month pro forma interest coverage is a strong indicator of a company's likelihood to engage in a liability management exercise (LME). Companies that completed an LME typically showed a decline in interest coverage percentile compared to their sector cohorts, with a significant increase in pro forma gross leverage. The study examined over 75 companies, comparing their financial metrics to sector averages to identify potential LME candidates. The findings highlight that interest coverage and leverage are key signals for investors to prioritize credit work and assess LME risk within their portfolios.
Credit Research: Jared Muroff, CFA
Data Research: Martynas Juskys
 
Key Takeaways
 

  • We believe trailing-12-month pro forma interest coverage provides the strongest signal that a company may pursue a liability management exercise of all the 31 statistics we analyzed. The median company in our data set that completed an LME went from having a pro forma interest coverage at the 34th percentile to the 28th percentile as compared with its sector cohorts, while the mean company went from the 35th percentile of its cohort to below the 25th percentile.
     
  • The largest shift among the statistics we analyzed was pro forma gross leverage, with the median company that completed an LME having gross leverage above the 61th percentile as compared with its cohorts 24 months prior to the transaction to having gross leverage at the 82 percentile as compared with its sector cohort in the quarter immediately prior to the LME. The mean company had an even starker move, going from the 67th percentile to the 98th percentile.
     
  • Although these results are not particularly surprising (i.e., companies that pursue an LME struggle to pay interest and have high leverage), in our view, it does provide some context as to how investors could screen their portfolio for potential LME candidates, before doing deeper document and financial due diligence.
     
  • We tested a sample of more than 75 different anonymized companies from our LME Database across more than 30 metrics tracked by Fundamentals to see how the metrics changed in the 24-month period before the LME as compared with their sector cohort.
 

Determining whether a specific company is likely to restructure its capital structure out of court requires an understanding not only of the company’s specific financial situation but also what the credit documents across its structure allow. Although we are big fans of this individual-company type of analysis (see Mercer International, Cornerstone Building Brands and Jeld-Wen, among others), we also wanted to provide investors with a rubric for understanding which companies within the portfolio might be at the most risk of an LME so that the specific credit work can be prioritized.

With that in mind, we looked at more than 75 different companies that completed an LME transaction between the beginning of 2023 and the end of the first quarter of 2026 with a view toward understanding if there were any clues about a potential transaction lurking in financial reports in the two years up to the transaction. We included in our analysis any company in our LME Database for which we had the relevant financial information. For each of these companies, we attempted to compare their financial metrics over this period to their sector’s financial metrics to tease out some signal from the noise, as different sectors will have different metrics.

The results of our analysis, which show, unsurprisingly, that interest coverage and leverage provide the best signals, are below:
 

(Click HERE to enlarge.)

Note that not all of the data for all of the companies is available for all of the time periods needed, which is why for certain metrics there may be a smaller number of companies in the sample. Some of these results may also be driven by outliers within the sample, which we have controlled for by using trimmed means and medians in our calculations. The chart above also highlights those results that may be driven by outliers more than the data itself.

Notes on Methodology

To perform our analysis, we collected data from Fundamentals on over 75 companies that completed an uptier, drop-down, double-dip / pari-plus or combination transaction in the first quarter of 2026 or earlier. Although our LME Database is expansive, we thought it made sense to focus on these types of transactions, as they are the ones most ripe for creditor-on-creditor violence and thus the ones of most concern for investors.

We did not break the data down by specific transaction type, nor for whether a transaction was pro rata, as we believe those decisions are downstream from the given financials of a subject company and relate more to what the documents allow than for what the company might need.

For each of the companies in our data set, we pulled 31 different financial metrics for the quarters between 24 months prior to the transaction and the quarter of the transaction to see if we could spot any trends in the data.

We decided not to look at the data in a vacuum but instead to consider how these metrics moved in relation to the other companies in the subject company’s sector over that time period. We believe comparing the data for a given company with its sector cohorts makes the most sense as that is how market participants consider these names.

Although this analysis elides several key factors, including what market participants will bear at the time of the deal and what the documents allow, we think cutting the data in this way provides some insight into how investors can begin to rank their holdings as to the level of LME risk they might have.

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