DENVER & LONDON–(BUSINESS WIRE)–Corporations around the world are paying down debt for the first time since 2014/15, according to the latest annual Janus Henderson Corporate Debt Index. Operating profits grew 51.4% to a record $3.36 trillion in 2021/22, driving significant increases in cash flow that enabled capital expenditures, record dividends, buybacks equity and debt servicing and repayment. As a result, the net debt1 fell 1.9% to $8.15 trillion in 2021/22, a reduction of 0.2% at constant exchange rates.
Slightly more than half of companies (51%) reduced their debt overall; those outside the United States were more likely to do so, with 54% reducing their net borrowing. A quarter of the companies in the Janus Henderson index have no debt; this group collectively has a net cash position of $10 trillion, half of which is owned by nine major corporations. These include technology-focused companies in various industries, such as Alphabet, Samsung, Apple and Alibaba.
Debt sustainability measures have improved significantly in 2021/22, with the global debt-to-equity ratio declining by 5.7 percentage points to 52.6%, and three-quarters of sectors registering an improvement. The proportion of operating profit consumed by interest expense fell to its lowest level in the index’s eight-year record – at just 11.3%, due to low rates and strong profit margins.
For the year ahead, Janus Henderson expects leverage to decline further as higher funding costs and an economic slowdown cause companies to be more cautious. Janus Henderson estimates that net debt will decline by $270 billion (-3.3%) at constant exchange rates to $7.9 trillion by the same time next year.
Largest debt reductions in the energy, mining and auto sectors
The most significant change has been observed in the energy sector; oil and gas producers cut debt by $155 billion, down a sixth year over year2 as soaring energy prices led to a significant reversal in the fortunes of the sector. Booming cash flow from global mining companies led to a quarter reduction in debt3. Elsewhere, component shortages have limited car sales but led to a higher-margin sales mix, reducing the need to fund consumer credit programs among automakers.
Despite record profits, corporate debt in the United States is rising
Soaring profits in 2021/22 have allowed US companies to pay their shareholders record dividends and undertake large-scale share buyback programs. With such strong cash flows, there was no significant year-over-year increase in the collective total net debt of U.S. corporations (+0.5%), although a majority ( 53%) saw their debts increase. Among US companies, the biggest increase was Verizon, which borrowed heavily to pay for spectrum licenses. Amazon’s investment in real estate and equipment also meant it was increasing its borrowing significantly.
A preference for using debt as a larger part of the financial mix means that only one in six U.S. companies have net cash on their balance sheet, compared to nearly one in three elsewhere in the world, although companies cash-positive Americans are so wealthy that they hold two-fifths of all corporate cash deposits.
Investment opportunities for bondholders
In bond markets, corporate bond yields rose sharply, particularly in the high yield segment, increasing the cost of issuing new bonds. Companies respond by redeeming bonds; face value4 of listed bonds has fallen by $115 billion since the start of June 2021. The differentiation between high and low risk issuers, between sectors and between different debt maturities is now much greater, which presents real opportunities for managers active funds like Janus Henderson. With most sectors facing headwinds, portfolio managers are looking for lower-risk options in more defensive sectors, while remaining selective.
Seth Meyer, bond portfolio manager at Janus Henderson said:
“Economic growth may slow or reverse, but companies are starting from a very profitable position. Many have strong cash flow that can cover rising interest costs. Moreover, they are not excessively indebted and do not have major refinancing needs. This suggests companies will weather the recession and use the cash flow to cut borrowing further rather than face an existential challenge that could force them to turn to lenders again.. There’s no doubt that a bear market is an uncomfortable place for investors, but for new capital looking for corporate bonds, the yields are far more attractive than in recent years.
Notes to Editors
Janus Henderson Group is a leading global active asset manager dedicated to helping investors achieve their long-term financial goals through a wide range of investment solutions, including equity, securities fixed income, multi-asset and alternative asset classes.
As of March 31, 2022, Janus Henderson had approximately $361 billion in assets under management, more than 2,000 employees, and offices in 23 cities around the world. Based in London, the company is listed on the NYSE and ASX.
1 Long-term and short-term debt less cash and cash equivalents
2 -17.3% or $155 billion at constant exchange rates; -18.5% or $166 billion not adjusted for exchange rate fluctuations
3 -23.4% or $35.1 billion not adjusted for exchange rate variations, -22.8% at constant exchange rates
4 Face value is the amount borrowed, not the current market value of the bond
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