Company debts $8.1 trillion; German firms to fore

Volkswagen's transparent factory in Dresden

By Mark McSherry — The net debt of companies around the world fell 1.9% to $8.15 trillion in 2021-22, a reduction of 0.2% on a constant-currency basis, according to the latest annual Janus Henderson Corporate Debt Index report.

The largest borrowers were Toyota Motor Corp with $186 billion of debt, Volkswagen AG with $185 billion, AT&T Inc with $182 billion, Verizon Communications Inc with $174 billion, Deutsche Telekom AG with $153 billion, Mercedes-Benz Group AG with $109 billion, and Électricité de France SA with $104 billion.

German corporate net debts accounted for 40.7% of the European $1.95 trillion debt total, mainly owing to the dominance of Germany’s three big car manufacturers, which borrow to finance their customers’ vehicle purchases.

Volkswagen, Mercedes-Benz and BMW collectively account for one fifth of European companies’ net debts.

The net debt to equity ratio of German companies is 100%, well above the global average, and reflects the highly capital-intensive nature of industry in the country.

“Just over half of companies (51%) globally reduced debts; those outside the United States were more likely to do so, with 54% reducing net borrowings,” said the report.

“One quarter of the companies in Janus Henderson’s index have no debts at all; this group collectively has net cash of $10 trillion, half of which belongs to nine large companies.

“These include technology-driven companies across a range of sectors, such as Alphabet, Samsung, Apple and Alibaba …

“For the year ahead, Janus Henderson expects indebtedness to fall further as higher funding costs and an economic slowdown push companies to be more conservative.

“Janus Henderson estimates that net debts will fall by $270bn (-3.3%) on a constant-currency basis to $7.9 trillion by this time next year.”

The report added: “In 2021/22, the biggest change was seen in the energy sector.

“Oil and gas producers saw their net borrowings fall by $155bn on a constant-currency basis, down by one sixth year-on-year as rocketing energy prices drove a dramatic turnaround in the sector’s fortunes; operating profits rebounded by $412bn year-on-year.

“The fall in debt meant the sector repaid all the additional borrowing taken on in 2019/20 and 2020/21.

“Just four companies – Shell, Exxon, Equinor, and BP – accounted for half the reduction during the year.

“Surging cash flow funded higher dividends and burgeoning share buyback programmes as well as debt repayments, which were directed towards settling short-term borrowings at a time of rising interest rates.

“The sector now has its lowest leverage, or gearing, since at least 2014. The debt/equity ratio which compares borrowing to shareholder capital fell to 32.5%, down more than ten percentage points in a year …

“Utilities are the most heavily indebted sector, owing $1 in every $6 of the world’s total, up from $1 in $7 two years ago.

“Debts were $94.5bn higher on a constant-currency basis, rising 7.6% year-on-year.

“US and European utilities saw the biggest increase. The sector’s net debt/equity ratio rose to 134%, well ahead of the 53% average across all sectors, while interest expenses rose to over two fifths of operating profit, almost four times the average.

“Both these measures have climbed steadily in recent years on the back of cheap money.

“Utilities can typically bear much bigger debts, but they are not immune to the change in global financial conditions, and they face a squeeze on margins with energy prices so high.

“Moreover, they face a significant investment burden from the energy transition …

“The cost to companies of issuing new bonds has climbed significantly since this time last year as bond markets have repriced to reflect rising inflation, higher central bank policy rates and expectations of further rate hikes to come.

“The median yield on investment grade debt was 4.1% at the end of May 2022, up from 1.7% the year before.

“The median yield on high yield bonds had jumped even more, now at 6.9%, up from 4.0%.

“Moreover, the dispersion of yields has increased significantly among high yield bonds; it has also increased marginally in the investment grade segment …”