Net debts jumped $907 billion this year – the largest increase in the last five years – as company resources were depleted by debt-financed acquisitions, share buybacks, and the “chilling effect” on profits caused by trade tensions and the global economic slowdown.
“As the economic cycle came to an abrupt end this year, companies faced the downturn with record borrowings, said Jay Sivapalan, head of Australian fixed interest at Janus Henderson. “They have now scrambled to issue new bonds and borrow from banks to ensure they have enough ready cash to weather lockdowns of varying severity around the world.”
Companies in Janus Henderson’s corporate debt index, which comprises the 900 largest non-financials in the world, owe 37 per cent more than they did in 2014 – and rising debt has “comfortably outstripped” growth in profits. The most indebted company in the world is Volkswagen, with a debt of $278 billion that approaches the level of debt owed by South Africa or Hungary.
“Borrowing needs will be very large this year, even though companies in our index are set to cut their dividends by [$]203 billion to [$]435 billion this year, are slashing share buybacks, putting acquisitions on hold and reducing capital expenditure,” Mr Sivapalan said. “Much will depend upon the extent to which new borrowing is spent or held as cash reserves, and on how much companies issue in new shares to bolster their balance sheets.
“It’s clear, however, that 2020 will see net corporate debts soar to another new record, as much as [$]1.45 trillion higher than 2019.”
Mr Sivapalan now sees a looming deleveraging cycle in Australia that could be a “once-in-a-decade event for credit markets”.
“As bond investors, we care most about a company’s ability to repay its debts,” Mr Sivapalan said. “Most importantly we will be looking for signs that a company is strengthening its position when conditions improve – using surplus cash flow to pay down debts rather than spending it or issuing new shares to rebalance the financing mix between equity and borrowing. This pushes bond prices higher, generating capital gains for investors.”
