The companies that only survive on cheap money

A decade of suppressed interest rates created a comfortable corporate myth: that financial solvency is primarily an accounting convention rather than a cash-flow discipline. With US high-yield benchmark yields hovering near 8.5 per cent, down from recent double-digit scares but still four times the cost of pandemic-era borrowing, that illusion is meeting its financial boundary. A wide swath of lower-tier corporate borrowers—firms that flourished exclusively under a regime of zero-cost capital—now face an existential test of their floating-rate debt structures.

The primary vulnerability is concentrated in leveraged loans and unrated private credit. Unlike public investment-grade issuers who locked in ten-year fixed coupons at negligible spreads, private equity-backed middle-market entities relied extensively on floating-rate syndicated paper.

Coverage Ratio Decay

When benchmark SOFR resets from zero to nearly 4.5 per cent, interest coverage ratios for issuers with B-minus ratings compress precipitously. A business levered at six times EBITDA, which comfortably serviced its interest obligations at a 4 per cent all-in coupon with a 2.5x interest coverage ratio, suddenly discovers that its interest expense absorbs over seventy per cent of free operating cash flow.

Cap-ex budgets are dismantled, growth projects cancelled, and routine maintenance deferred simply to prevent loan defaults. Private debt funds, having stepped into the void left by risk-averse syndication desks, find themselves executing quiet amend-and-extend agreements to mask the deterioration of portfolio liquidity.

The Zombie Reckoning

This dynamic shifts the credit default cycle from sudden liquidation to slow, grinding balance-sheet erosion. Zombie companies do not collapse in a single cinematic default; they slowly bleed operational viability as free cash is diverted to senior floating-rate lenders.

Equity sponsors are forced to inject emergency junior capital or surrender control through debt-for-equity swaps. In an 8 per cent high-yield regime, the structural failure of unprofitable business models is no longer a tail risk; it is a mathematical inevitability that will steadily cull corporate rosters throughout the coming refinancing cycle.