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Corporate debt hits record $8.3trn

Global corporate debt could rise by a further $1tn in 2020
July 15, 2020 and Nilushi Karunaratne

Global corporate debt surged to a record $8.3 trillion (£6.6trn) in 2019, up 8.1 per cent year on year and the fastest increase in at least five years. The Janus Henderson Corporate Debt Index, which covers the largest 900 non-financial companies in the world, predicts that the overall figure could rise by a further $1trn in 2020. 

The report noted that borrowing was hitting new highs even before coronavirus struck. Collective net debt increased by $625bn last year, as balance sheets were drained by debt-financed acquisitions, share buybacks, record dividends, as well as the impact of global trade tensions and an economic slowdown. Borrowing was encouraged further by low interest rates, as central banks moved to stimulate economies.

It follows that growth in debt has surpassed growth in profits. Companies included in the index now owe almost two-fifths more than they did in 2014, while pre-tax profits have risen by less than a tenth to $2.3trn. 

Variations by geography and sector

Organisations in the US and the UK are among the most indebted in the world, while those in Japan and other parts of Asia are among the lowest. Indeed, in the UK, debts hit $539bn in 2019, growing slightly faster than the global average. Vodafone (VOD) accounted for half of the growth as it financed its purchase of Liberty Global (US:LBTYA), while Royal Dutch Shell (RDSB) also borrowed to support its $15bn dividend payout. 

Asset manager Janus Henderson pointed out that cyclical sectors, or those linked to certain emerging technologies, tend to owe very little – but big traditional asset-rich industries support the heftiest debts. For example, utilities and telecoms companies together owe more than a quarter of the global total. 

The outlook for 2020

Borrowing is forecast to escalate again this year, even though companies in the index are set to cut dividends by as much as $300bn, pulling share buybacks, pausing potential acquisitions and pushing down capital expenditure. This comes as the pandemic has squeezed profits and cash flow, an issue that will be exacerbated by the likely recession to come.

Many businesses are looking to bolster their cash reserves. For example, Rolls Royce (RR.) recently secured a new £2bn term-loan facility, boosting its liquidity to £8.1bn. The engine maker hopes this will absorb the near-term cash flow pressures created by the Covid-19 crisis. 

Tom Ross, a corporate credit portfolio manager at Janus Henderson, believes that the purpose of the debt market is in part to support companies during crises such as the pandemic – allowing them to go into “balance sheet repair mode”. Supported by low interest rates, he argues that companies should, generally, be able to service their debts. 

Bond issuance on the up

Companies have rushed to issue bonds during this crisis, particularly as central banks have moved to purchase corporate debt. In the first five months of 2020, companies in the Janus Henderson index tapped bond markets for $384bn.

Mr Ross expects bond issuance to rise further this year, as market turbulence eases and companies seek to reduce their dependence on state support. He believes that some corporate bonds could offer attractive returns for investors. The rate of interest is often higher than for a savings account or government bonds. 

But they can be a riskier bet. Downgrades of companies’ credit ratings have been flowing in, with some bonds being reclassified as non-investment grade or ‘junk’.