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 debt1 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-year2 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 quarter3. 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.
Despite record profits, corporate debt in US increases
Surging profits in 2021/22 enabled US companies to pay shareholders record dividends and undertake large-scale share buy-back programs. With such strong cash flow, there was no material increase in the collective total net debt among US companies year-over-year (+0.5%), though a majority (53%) did see debts rise. Among US companies, the biggest increase was at Verizon, which borrowed heavily to pay for spectrum licences. Amazon’s investment in property and equipment also meant it also added significantly to its borrowings.
A preference for using debt as a larger part of the finance mix means just one in six US companies has net cash on its balance sheet, compared to almost one in three elsewhere in the world, though cash-positive US companies are so wealthy that they own two fifths of all corporate cash deposits.
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 value4 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, Fixed Income Portfolio Manager at Janus Henderson said:
“Economic growth may slow or go into reverse, but companies are starting from a very profitable position. Many have strong cash flows that can cover increasing interest expenses. Further, they are not excessively levered and do not have major refinancing needs. 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. 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.”