Leveraged borrowers turned out another quarter of resilient earnings strength, keeping a lid on credit pressure as the financing environment grows costlier. Across a sample of loan issuers in the Morningstar LSTA US Leveraged Loan Index, revenue grew 8% and EBITDA 9%, both repeating their growth rates from the first quarter. Those metrics held at their highest readings since 2022. (In Q2 2025, revenue was up 6% and EBITDA grew 4%.) The Q2 results were based on 165 issuers that file their results publicly, or 12% of the index by both issuer count and par amount of loans ($186 billion).
The humming earnings engine continues to propel borrowers mostly ahead of credit strains. Average leverage was lower in Q2 (4.85x, from 5.01x in Q1 and 5.08x a year ago). On a weighted average basis, it was up just four basis points sequentially (at 5.23x) and down 10 bps year to year.
With investors vigilant for signs of debt-servicing hiccups as rates rise, strong earnings were a salve for key coverage ratios as well. Earnings covered interest expense by 4.95x, on average, up five basis points sequentially and up 44 bps year to year. That's the highest coverage reading since Q1 2023. (On a weighted average basis, the measure was five basis points lower sequentially, at 4.51x, but still 48 bps higher year to year.) Another coverage measure shows what's left after accounting for capital spending — a key credit risk emerging as companies scramble to adapt competitively to AI and other disruptions.
After stripping out capital expenditures from the EBITDA results, cash flow coverage of interest expense was similarly higher on an average basis (3.49x, up two basis points sequentially and up 18 bps from Q2 2025) and mixed on a weighted average basis (3.22x, down six basis points sequentially but up 26 bps from Q2 2025). Resilient earnings are keeping most borrowers back from the credit precipice. Borrowers with "outer edge" leverage levels (debt/EBITDA of more than 7x) held at 17% of the pool, same as in Q1 and the year-ago quarter.
Twenty-two percent of the pool had cash-flow coverage of less than 1.5x, the same as in Q1 and up from 20% last year. During the pandemic, those outer edge shares topped out at 35% for leverage and 29% for cash flow coverage. Earnings strength was consistent up and down the credit quality ladder.
Excluding the spotlighted finance, energy, and hyperscaler sectors, BofA Global Research tracked 6.1% year-over-year earnings growth for "core" investment-grade bond and loan issuers (earnings were up 28% with them), stronger than in Q1. Revenue growth was more than 7%. The weakest sectors were health care, consumer products, and transportation.
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