Companies around the world took on $456 billion of net new debt in 2022-23, as of March 31, pushing the outstanding total up 6.2% on a constant-currency basis to a record $7.8 trillion, according to the latest annual Janus Henderson Corporate Debt Index.
This exceeded the 2020 peak, once movements in exchange rates were taken into account.
Janus Henderson said the companies that borrowed the most in 2022-23 were Verizon Communications Inc. with $172 billion, Toyota Motor Corp. with $167 billion, Volkswagen AG with $164 billion, AT&T Inc. with $154 billion, and Deutsche Telekom AG with $153 billion.
“Higher interest rates helped slow appetite to borrow but have not yet made a significant impact on the interest costs faced by most large companies …” said the report.
“Profitability over the last year exceeded even 2021/22’s super-normal level. Global pre-tax profits (excluding financials) rose 13.6% to a record $3.62 trillion, though the improvement was heavily concentrated.
“Nine tenths of the $433bn constant-currency increase in profit was delivered by the world’s oil producers which are enjoying booming energy prices. A number of sectors, including telecoms, media and mining saw lower profits year-on-year.
“Higher profit boosted equity capital, and this meant the debt/equity level, an important measure of debt sustainability, held steady at 49% year-on-year, despite increased borrowing …
“With dividends and share buybacks up and cash flow down, companies bridged the gap either by adding to their borrowings or running down their cash piles …”
James Briggs and Michael Keough, Fixed Income Portfolio Managers at Janus Henderson, wrote: “The exact path for the global economy and corporate earnings may be very unclear, but the end of the rate-hike cycle and the return of ‘income’ mean there is a lot for corporate bond investors to be happy about.
“Debt levels may have risen but they are very well supported, and the global economy has remained remarkably resilient.
“This resilience and the extraordinarily high levels of profitability companies have enjoyed in the last two years reflect vast sums of government deficit spending and central bank liquidity stimulus during the pandemic.
“The surge in interest rates needed to quell the resulting inflation is succeeding in most parts of the world, but it is not at all clear when and to what extent the economy will suffer the more painful consequences – higher unemployment and lower profits.
“For companies, higher interest costs will gradually increase pressure for the foreseeable future, affecting some more than others depending on their creditworthiness and the structure of their borrowings.
“All this means exciting times for corporate bond investors. Most obviously, higher interest rates mean ‘income’ is back as a theme.
“Investors can now lock into meaningful levels of income for the first time in years. Not only that, but when market interest rates fall to reflect lower inflation and a slowing economy, bond prices rise, generating capital gains too. Central banks are likely to start cutting rates in 2024.
“A slowing or even shrinking economy will hit the creditworthiness of some borrowers more than others but the extent of this impact and the time lags are very uncertain at present. This phase of the credit cycle is one where sector and security selection are very important.
“Under these conditions, we prefer to focus on high quality companies with strong balance sheets, steady cash flow and resilient fundamentals.”
The report added: “The global economy is slowing as higher interest rates exert pressure on demand. Corporate earnings are expected to fall from their record levels as a result.
“Higher borrowing costs and slower economic activity mean companies will look to repay some of their debts, though there will be significant variation between different sectors and between the strongest and weakest companies.
“Net debt is likely to fall less than total debt as cash-rich companies continue to reduce their cash piles. Overall we expect net debt to decline by 1.9% this year, falling to $7.65 trillion …
“The 8.7% increase in US corporate net debt in 2022/23 was faster than the global average and took the total to a record $3.66 trillion.
“The $319bn increase contributed two thirds of the global rise, much more than US companies’ 48% share of outstanding borrowing.
“Five companies – Amazon, Warner Bros Discovery, Alphabet, Microsoft and Meta – accounted for half the increase in US corporate net debt, supplementing their cash flow either by reducing their cash piles or by taking on new debt in order to fund investments, acquisitions, dividends and share buybacks.
“59% of US companies took on more debt over the last year compared to 54% outside the US. Alphabet, Apple and Microsoft remain among the world’s ten most cash-rich companies today.
“With a net debt/equity ratio of 67%, US companies rely more heavily on borrowing than those in most comparable countries.
“Germany’s ratio is higher, reflecting its heavy-industrial base, while utilities and telecoms largely account for Spain’s higher level. Eight US companies in ten have net debt on the balance sheet compared to six in ten outside the US …
“French companies owe a net $333bn, the sixth largest total in the world. They took on just 1.2% more borrowing on a constant-currency basis in 2022/23, with only one third (36%) adding to their outstanding loans.
“Doubtless, higher interest rates deterred new borrowing. The cost of financing French corporate debt was 19.9% higher in 2022/23 as rising interest rates bit into corporate profits.
“Nevertheless, profitability remained close to 2021/22’s exceptional levels, boosting equity capital despite strong dividends and share buybacks in France. The collective French net debt/equity ratio fell to 42.7% as a result, well below the global average …
“Germany’s companies account for the second largest share of global net debt after the USA, thanks to much of German industry being capital intensive in nature.
“At 84.6%, Germany’s net debt equity ratio is second only to Spain’s among major economies.
“Borrowing fell 2.0% on a constant-currency basis to $708bn in 2022/23, driven principally by the auto sector, utilities and healthcare.
“Rate rises meant interest costs rose 13.8% at constant exchange rates. Less than half the German companies in our index took on more borrowing during that period …
“Swiss corporate debt jumped by $17bn on a constant-currency basis, to a record $104bn, an increase of 20.0%.
“Nestle, which accounts for half the debt of Swiss companies in our index, saw its borrowings rise $16.5bn to fund generous share buybacks, a large dividend, a surge in inventories and ongoing investment. Two thirds of Swiss companies in our index took on more borrowing in 2022/23 …”