· Companies paid a record $458bn in interest in 2023/24, up 24.4% year-on-year
· UK company net debts rose just 3.2% in 2023/204, a slower increase than the global rate, while interest costs rose by 29.6% year-on-year
· European company interest bills surged for 2nd year; US firms finally feeling the effects of higher refinancing costs
· Higher interest costs consumed one eighth (12.4%) of operating profits in 2023/24
· Janus Henderson expects borrowing levels to continue to rise in 2024/25 but at an even slower pace, up by 2.5% to a record $8.38 trillion
The impact of higher for longer interest rates began to bite in 2023/24, according to the latest annual Global Corporate Debt Index from Janus Henderson.
In 2023/24, the amount the world’s largest listed companies spent on interest payments surged by a quarter (+24.4% constant currency), paying banks and bondholders a record total of $458bn, up by $89bn year-on-year. Debt service costs are at record levels in every country in the index and in every sector.
Janus Henderson expects borrowing levels to continue to rise in 2024/25 but at an even slower pace, up by 2.5% to a record $8.38 trillion. The cost of debt servicing will continue to grow even as central banks cut interest rates as cheaper older debt is refinanced at new higher rates.
UK company net debts rose just 3.2% to $484bn while interest costs rose 29.6% year-on-year
British company net debts rose just 3.2% in 2023/24 at constant exchange rates, to $484bn, a slower increase than the global rate. Interest costs for UK companies rose by 29.6% year-on-year. Mining groups including Glencore made the largest impact by borrowing significant sums to fund dividends and share buybacks as operating cash flow fell due to less than favourable market conditions.
In addition, acquisitions, dividends and share buybacks meant higher borrowing for firms such as Ashtead. Vodafone, Britain’s most indebted company, reduced its net borrowings with the proceeds of asset disposals.
Total global corporate profitability (excluding financials) fell in 2023/24 down by 7.7%, with lower energy prices making the biggest impact as well as sharp falls in the mining sector. Overall, the sector makeup of the UK stock market meant it was most exposed to dramatic falls in energy and mining prices.
European company interest bills surged for 2nd year; US firms finally feeling the effects of higher refinancing costs
European interest costs jumped 28% on a constant-currency basis in 2023/24, the second consecutive year of rapid increases, despite debt levels remaining roughly flat for five years. Companies in the region are now footing an interest bill 54% larger than in 2020/21.
By contrast, it has taken much longer for US companies to feel the effects of higher interest rates, owing to more long-term financing via the bond market, After escaping almost unscathed in 2022/23, their collective interest bill jumped by more than a fifth (+23%) in 2023/24 as bonds were steadily refinanced at higher interest rates.
Japanese companies saw interest bills rise fastest, but overall burden stayed low
The fastest increase came in Japan, where rate increases from near-zero levels have pushed interest costs up by two fifths year-on-year (+39%); they are now more than double their 2020/21 total. Debt levels are, however, relatively small in Japan compared to the size of the economy, corporate balance sheets are not highly geared, and rates remain very low.
Profit margins are high so record interest costs are affordable for most
Higher interest costs consumed one eighth (12.4%) of operating profits in 2023/24, up markedly from one ninth in 2022/23. Despite the increase they have, however, merely returned to a level consistent with the long-run average. They are likely to take a bigger bite in the year ahead.
Growth in borrowing slowed markedly
The world’s largest listed companies took on $378bn of net new borrowing in 2023/24, pushing the total up 4.9% on a constant-currency basis to a record $8.18 trillion. This increase was, however, significantly lower than in 2022/23 and was also well below 2018 and 2019. Higher interest rates have clearly been a factor in moderating appetite to borrow over the last year.
Tim Winstone, Portfolio Manager on the Corporate Credit Team at Janus Henderson said: “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’s important to remember 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.
Sector Insights
· Takeovers drove half the increase in borrowing – especially in pharma sector
o Takeovers were the major driver of the increase in corporate net borrowing. Big deals in the healthcare sector alone accounted almost one third of the rise in borrowing, including Pfizer’s purchase of Seagen.
o Across all sectors, Janus Henderson estimates that takeovers net of disposals accounted for around half of the increase in global net borrowing in 2023/24.
· Vehicle manufacturers took on large new debts to finance sales
o A quarter of the increase in borrowing 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.
o As a result, Volkswagen regained its position as the world’s most indebted company during the year.
· Big 7 US technology stocks saw cash pile up
o 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 buybacks5. Google remained the most cash-rich company in the world.
Overall fewer companies added to borrowings in 2023/24
Just over half the companies in the index (53%) increased the amount they owe in 2023/24, down from 57% the year before as higher interest rates discouraged more of them from additional borrowing.
Tim Winstone, Portfolio Manager on the Corporate Credit Team at Janus Henderson, added:
“In the bond markets, we feel that spreads have narrowed too far for riskier borrowers, for long maturities and for USD corporate bonds, in particular. We prefer to focus on investment grade companies, especially in regions like Europe where spreads are more attractive. We also favour non-cyclical industries at present, because companies in highly cyclical industries, like mining, are enjoying unjustifiably narrow spreads given the higher risk to their earnings.
“We are optimistic for the year ahead. Economies have weathered higher rates well and seem to be landing relatively softly. As the rate cycle finally turns downwards, bonds will perform well as yields fall, driving capital returns for investors.”
