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Janus Henderson Corporate Debt Index — Global corporate net debt falls for the first time in 8 years

Companies around the world are repaying debts for the first time since 2014/15, according to the latest annual Janus Henderson Corporate Debt Index.

Operating profits rose 51.4% to a record $3.36 trillion in 2021/22, driving a significant increase in cash flows that provided for capital expenditure, record dividends, share buy-backs and debt servicing and repayment. As a result, net debt[1] fell 1.9% to $8.15 trillion in 2021/22, a reduction of 0.2% on a constant-currency basis.

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. 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.

Measures of debt sustainability improved sharply in 2021/22, with the global debt to equity ratio falling by 5.7 percentage points to 52.6%, and three quarters of sectors seeing improvement. The proportion of operating profit consumed by interest expenses fell to its lowest on the index’s eight-year record – just 11.3%, owing to low rates and strong profit margins.

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.

Largest debt reductions in energy, mining and car sectors

The biggest shift was seen in the energy sector; oil and gas producers cut debt by $155bn, down by one sixth year-on-year[2] as rocketing energy prices drove a significant turnaround in the sector’s fortunes. Booming cash flow among the world’s mining companies meant debts were reduced by one quarter[3]. Elsewhere, shortages of components restricted car sales but drove a higher margin sales mix, leading to a reduced need to fund consumer finance programmes among car manufacturers.

UK debts fall by one tenth

UK company debts fell 10% on a constant-currency basis in 2021/22 to $521.0bn, taking their share of the global pie to 6.4%, its lowest since the index began in 2014. Asset disposals and soaring cash flow at Shell and BP accounted for most of the decline, but three quarters of UK companies also reduced their net debts during the year. There was a particular focus on the reduction of short-term borrowings, which fell by a fifth year-on-year. In addition, among the few that saw higher borrowings, Astrazeneca financed its acquisition of rare diseases specialist Alexion, and Unilever used new loans to fund capital expenditure, acquisitions and share buybacks.

Investment opportunities for bond holders

In the bond markets, corporate bond yields have risen sharply, especially in the high-yield segment, raising the cost of issuing new bonds. Companies are responding by redeeming bonds; the face value[4] of listed bonds has reduced by $115bn since early June 2021. There is now much greater differentiation between high- and low-risk issuers, between sectors and between different maturities of debt, presenting real opportunities for active fund managers like Janus Henderson. Most sectors are facing headwinds, so portfolio managers are seeking lower risk options in more defensive sectors, whilst remaining selective.

Seth Meyer and Tom Ross, fixed income portfolio managers at Janus Henderson explained: “Companies around the world wisely opted to bridge with borrowing the gulf which opened in global economic activity by the pandemic. These debts were intended to be temporary – and so they were, as the increased focus on reducing short-term debts over the last year proves.

 We expect the decline to continue. Economic growth may slow or go into reverse, but companies are starting from a very profitable position so they have strong cash flow and can easily cover their interest expenses. Plus they are not excessively levered (geared) and do not have major refinancing needs, meaning they are not ‘forced’ borrowers. This suggests that companies will weather the downturn and use cash flow to reduce borrowings further rather than face an existential challenge that might require them to turn to lenders again to see them through.

There is no doubt that a bear market is an uncomfortable place for investors, but for new capital looking at corporate bonds, yields are far more attractive than in recent years. Cash savings are almost certain to lose money in real terms in an environment of high inflation in any case. What’s more, investors have become heavily overweight in equities as stock markets boomed, so portfolio rebalancing to favour more fixed income could be beneficial for many. The current downturn will come to an end and with more opportunities for stock selection opening up, there is still a strong case to be made for investing in corporate bonds.”

 

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