Companies around the world took on $456bn1 of net new debt in
2022/23 (as of March 31, 2023), pushing the outstanding total up
6.2% on a constant-currency basis to a record $7.80 trillion,
according to the latest annual Janus Henderson Corporate Debt
Index2. This exceeded the 2020 peak, once movements in exchange
rates were taken into account.
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Nevertheless, one fifth of the net-debt increase simply
reflected companies such as Alphabet and Meta spending some of
their vast cash mountains. Total debt, which excludes cash
balances, inched ahead globally by just 3.0% on a constant-currency
basis, around half the average pace of the last decade. Higher
interest rates have begun to slow appetite to borrow but have not
yet made a significant impact on the interest costs faced by most
large companies.
Verizon, the US telecoms company, became the most indebted
non-financial company in the world in 2022/23 for the first time.
Google’s owner Alphabet remained the most cash-rich company.3
Balance sheets remain strong thanks to record profits
Global pre-tax profits (excluding financials) rose 13.6%4 to a
record $3.62 trillion in 2022/23, though the improvement was
heavily concentrated. Nine tenths of the $433bn constant-currency
increase in profit was delivered by the world’s oil producers. A
number of sectors, including telecoms, media and mining saw lower
profits year-on-year. Take all together, higher global profit
boosted equity capital, and this meant the global debt/equity
level, an important measure of debt sustainability, held steady at
49% year-on-year, despite increased borrowing.
Cash flow declined from record levels
Cash flow, which takes into account factors like investment and
working capital, did not follow profits higher in 2022/23, however,
dipping by 3%5 from record 2021/22 highs. Despite lower cash flow,
companies distributed a record $2.1 trillion in dividends and share
buybacks, up from $1.7 trillion the year before, and bridged the
gap with higher borrowing or by running down cash piles.
Higher interest rates are only slowly impacting
companies
Many large companies finance their debts with bonds that have
fixed interest rates (known as coupons), and this is delaying the
impact of higher interest rates – only about one eighth of bonds
are refinanced each year. The amount spent on interest only rose
5.3% on a constant-currency basis in 2022/23 which was
significantly less than the increase in global interest rates, and
interest consumed a record low 9.2% of profits6. There is
significant regional variation. US companies rely more on bond
financing and saw no increase in interest costs, but those in
Europe, where variable-rate loans arranged by banks are common,
interest costs rose by a sixth.
Income is back – corporate bonds are offering exciting
opportunities for investors
The median, or typical, yield on investment-grade bonds was 4.9%
by May, up from 4.1% a year ago and 1.7% in 2021. This presents
opportunities for bond investors to lock into higher income and it
raises the prospect of capital gains as the interest rates cycle
moves from increases to cuts in 2024.
Outlook
The global economy is slowing as higher interest rates exert
pressure on demand and on corporate profits. Higher borrowing costs
and slower economic activity mean companies will look to repay some
of their debts, though there will be significant variation between
different sectors and between the strongest and weakest companies.
Net debt is likely to fall less than total debt as cash-rich
companies continue to reduce their cash piles. Overall Janus
Henderson expects net debt to decline by 1.9% this year, falling to
$7.65 trillion.
James Briggs and Michael Keough, Fixed Income Portfolio
Managers at Janus Henderson explained:
“The exact path for the global economy and corporate earnings
may be very unclear, but the end of the rate-hike cycle and the
return of ‘income’ mean there is a lot for corporate bond investors
to be happy about.
Debt levels may have risen but they are very well supported, and
the global economy has remained remarkably resilient. This
resilience and the extraordinarily high levels of profitability
companies have enjoyed in the last two years reflect vast sums of
government deficit spending and central bank liquidity stimulus
during the pandemic. The surge in interest rates needed to quell
the resulting inflation is succeeding in most parts of the world,
but it is not at all clear when and to what extent the economy will
suffer the more painful consequences – higher unemployment and
lower profits.
For companies, higher interest costs will gradually increase
pressure for the foreseeable future, affecting some more than
others depending on their creditworthiness and the structure of
their borrowings. All this means exciting times for corporate bond
investors. Most obviously, higher interest rates mean ‘income’ is
back as a theme. Investors can now lock into meaningful levels of
income for the first time in years. Not only that, but when market
interest rates fall to reflect lower inflation and a slowing
economy, bond prices rise, generating capital gains too. Central
banks are likely to start cutting rates in 2024.
A slowing or even shrinking economy will hit the
creditworthiness of some borrowers more than others but the extent
of this impact and the time lags are very uncertain at present.
This phase of the credit cycle is one where sector and security
selection are very important. Under these conditions, we prefer to
focus on high quality companies with strong balance sheets, steady
cash flow and resilient fundamentals.”
Notes to editors
Janus Henderson Group is a leading global active asset manager
dedicated to helping clients define and achieve superior financial
outcomes through differentiated insights, disciplined investments,
and world-class service.
As of March 31, 2023, Janus Henderson had approximately US$311
billion in assets under management, more than 2,000 employees, and
offices in 24 cities worldwide. Headquartered in London, the
company is listed on the NYSE and the ASX.
This press release is solely for the use of members of the media
and should not be relied upon by personal investors, financial
advisers or institutional investors. We may record telephone calls
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this information are subject to change without notice
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1 Adjusted for constant exchange rates. 2 Figures exclude banks
and financials 3 See report for more details 4 Adjusted for
constant exchange rates. 5 Adjusted for constant exchange rates. 6
Average of last 8 years is 13.1%
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Press Enquiries Janus Henderson Investors Sarah
Johnson Director of Media Relations & Corporate Communications
T: +1 (303) 336 4219 E: Sarah.Johnson@janushenderson.com
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