The world’s largest listed companies took on $378 billion of net new borrowing in 2023-24, pushing total corporate debt up 4.9% on a constant-currency basis to a record $8.18 trillion, according to the Janus Henderson Corporate Debt Index report.
This percentage increase was lower than in 2022-23.
Higher interest rates on debt mean companies paid out $458 billion in debt interest payments to bondholders and other lenders, up 24.4% year-on-year.
Takeovers were the major driver of corporate debt — but many firms had insufficient cash to cover promised dividends and share buybacks and so they borrowed the difference.
The world’s most indebted company was Volkswagen, with $196 billion of debt.
The next most indebted firms were Toyota Motor Corp with $179 of debt, Verizon Communications Inc with $172 billion, AT&T Inc with $152 billion and Deutsche Telekom AG with $150 billion.
“Takeovers were the major driver of the increase in corporate net borrowing,” said the report.
“Big deals in the healthcare sector alone accounted almost one third of the rise; these included Pfizer’s purchase of Seagen, Amgen’s acquisition of Horizon and Roche buying Telavant.
“Across all sectors, we estimate that takeovers net of disposals accounted for around half of the increase in global net borrowing in 2023/24.
“Another one quarter of the increase came from the world’s vehicle manufacturers. They have enjoyed rising sales, with profits up by more than a quarter year-on-year. This has significantly increased their working capital need, in particular related to finance provided to customers.
“Some companies from a range of sectors, such as Chevron, Engie, Equinor, BHP and RTX had insufficient cash flow to cover promised dividends and share buybacks and so borrowed the difference.
“Dividends from the companies in our Corporate Debt Index jumped to a record $1.08 trillion over the last year, while share buybacks were $667bn, down year-on-year but still high by historic standards.
“The enormously strong cash flows from the Big 7 technology companies in the US meant their collective net cash balance grew by $52bn during the year, despite spending an astonishing $210bn between them on dividends and share buybacks.”
The report added: “Higher interest rates have clearly been a factor in moderating appetite to borrow over the last year …
“The amount of debt has increased but this is supported by earnings growth which has contributed to the debt/equity ratio holding steady at 48.9% …
“The year-on-year rise in net debt slowed from 6.2% to 4.9% as higher borrowing costs moderated the appetite to borrow, albeit with a less welcome rise in borrowing associated with merger and acquisition activity and distributions to shareholder …”
Michael Keough and Tim Winstone, Janus Henderson Fixed Income Portfolio Managers, said: “Several factors have contributed to the rise in net corporate debt in the past 12 months.
“Takeovers drove over half the increase in borrowing, particularly in the pharmaceutical sector, while some companies have been raising debt to make distributions to shareholders.
“Some of the rise in net debt, however, is a reflection of stronger growth, with auto companies requiring greater working capital to provide finance for rising sales. Meanwhile, net debt in the technology sector actively shrank as cash piles grew.
“The sharp increase in the amount companies spent on interest in the past year marks a sea change in corporate finances.
“The trend is evident everywhere but it is important to remember corporate debt servicing costs are coming from a historically low base throughout this process of rate normalisation.
“Nonetheless, even if central bank policy rates start to fall this year – as it seems they have already begun to – we expect to see interest bills continue to rise for the time being as old debts continue to mature and refinance at higher rates.
“On the whole, companies are absorbing these higher interest costs with little difficulty, though the impact is greater for smaller firms that often face a refinancing cliff edge, than for larger ones that typically have a range of maturities for their debts and so see a more gradual shift to higher interest bills.
“In the bond markets, we feel that spreads have narrowed too far for some riskier borrowers and some of the bonds with longer maturities.
“We are optimistic for the year ahead, however, as economies have weathered higher rates well and seem to be landing relatively softly.
“As the rate cycle turns downwards, we believe bonds have the potential to perform well as yields fall, driving capital returns for investors.”