Janus Henderson Investors (NYSE/ASX: JHG) announced today the
results of its first annual Corporate Debt Index survey. Key
findings include:
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- Company borrowings around the world surged to a record $8.3
trillion in 2019, up 8.1% year-on-year, the fastest increase in at
least 5 years
- Companies borrowed to fund takeovers, share buybacks and
dividends, as well as to invest
- Debts have risen significantly faster than profits over the
last 5 years
- In 2020, bond market analysis shows a sharp increase in
borrowing to meet challenges posed by the pandemic
- Janus Henderson expects company debts to rise by $1 trillion in
2020
- Volkswagen is the world’s most indebted company, owing almost
as much as South Africa, though this partly reflects a huge car
finance business
- Company debts have grown fastest in the US and Switzerland
- German debts are the second highest in the world after the US,
thanks to the car manufacturers and their financing businesses
Even before the pandemic began to batter company balance sheets,
company debts were soaring to new highs, according to the new
annual Corporate Debt Index from Janus Henderson (JHCDI). Net
borrowings1 around the world surged to a record $8.3 trillion in
2019, an increase of 8.1% year-on-year. Company resources were
depleted by debt-financed acquisitions, large share buybacks,
record dividends, and the chilling effect on profits caused by
trade tensions and a global economic slowdown. Collectively net
debts jumped by $625 billion last year, easily the largest increase
of any of the last five years. Growth in borrowing has been spurred
on in recent years by very low interest rates that make servicing
debts cheap, urged on by central bank attempts to stimulate
economies.
Companies included in the Corporate Debt Index (the largest 900
non-financials in the world) today owe almost two fifths (37%) more
than they did in 2014, and growth in debt has comfortably
outstripped growth in profits. Pre-tax profits for the same group
of companies have risen a collective 9.1% to $2.3 trillion.
Gearing, a measure of debt relative to shareholder finance, rose to
a record 59% in 2019, while the proportion of profit devoted to
servicing interest payments also rose to a new high.
These trends all accelerated in 2020 as the Covid-19 pandemic
struck. Janus Henderson’s analysis of bond markets shows that
companies in its index owe half their debts in the form of listed
bonds. They issued an additional $384bn in bonds between January
and May, an increase of 6.6% compared to the end of December
balances. Borrowing from banks has also increased sharply, though
precise figures are not yet available. Janus Henderson estimates
net borrowings overall will jump by up to $1 trillion this year, an
increase of 12%.
More than half of the companies in the index took on more
borrowing in 2019, but a very large impact was made by relatively
few of them. Just 25 companies between them borrowed an additional
$410bn last year, equivalent to one third of the increase in
borrowings of all those companies that added to their debts.
The most indebted company in the world is Volkswagen - its
eye-watering $192bn net borrowing is not far behind the sovereign
debt of South Africa or Hungary, though this is inflated by its
large car finance business. Not all companies borrow. A quarter of
the companies in Janus Henderson’s index have no debt at all, and
some have vast cash reserves. The biggest of these stands at $104bn
and belongs to Google’s owner Alphabet. What seems like prudence,
however, is often unpopular with shareholders, who may have better
uses for this capital.
Seth Meyer, Fixed Income Portfolio Manager at Janus Henderson
said:
“As the economic cycle came to an abrupt end this year,
companies faced the downturn with record borrowings. 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. Some companies have taken emergency government
support during the worst of the crisis when funding themselves
commercially became very expensive for a time. With market
conditions calmer, thanks to central-bank support and a gradual
reopening of economies, companies will want to reduce their
reliance on state hand-outs, so we expect bond issuance to rise
further.
“Acquisitions, share-buybacks and dividends each funded by debt
often precede an economic downturn. This has certainly been the
case this time round. As the global recession takes hold, profits
and cash flow will be sharply lower. Borrowing needs will be very
large this year, even though companies in our index are set to cut
their dividends by $140bn to $300bn2 this year, are slashing
share buybacks, putting acquisitions on hold and reducing capital
expenditure. 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 trillion higher than 2019.
“Borrowing is not a bad thing, as long as it’s appropriate, as
it can increase shareholder returns. And bonds present interesting
investment opportunities too. With interest rates low, crucially
companies are on the whole able to service their debts. As long as
companies have enough cash to bridge the lockdown gap, we think
that corporate bonds returns may look increasingly attractive to
investors.
As with all things, some companies do things better than others.
As bond investors, we care most about a company’s ability to repay
its debts. 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.”
Past performance is no guarantee of future results.
International investing involves certain risks and increased
volatility not associated with investing solely in the UK. These
risks included currency fluctuations, economic or financial
instability, lack of timely or reliable financial information or
unfavourable political or legal developments.
Notes to editors
About Janus Henderson
Janus Henderson Group (JHG) is a leading global active asset
manager dedicated to helping investors achieve long-term financial
goals through a broad range of investment solutions, including
equities, fixed income, quantitative equities, multi asset and
alternative asset class strategies.
Janus Henderson has approximately $294.4 billion in assets under
management (as of March 31, 2020), more than 2,000 employees and
offices in 27 cities worldwide. Headquartered in London, the
company is listed on the New York Stock Exchange (NYSE) and the
Australian Securities Exchange (ASX).
Learn more about Janus Henderson Investors at
janushenderson.com.
Janus Henderson is a trademark of Janus Henderson Group plc or
one of its subsidiaries.
© Janus Henderson Group plc
Past performance is no guarantee of future results. Investing
involves risk, including the possible loss of principal and
fluctuation of value. There is no assurance the stated objective(s)
will be met.
1 Total debts less cash and cash equivalents
2 Source: Janus Henderson Global Dividend Index, Edition 36 May
2020
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Sarah Johnson Director of Media Relations and Corporate
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sarah.johnson@janushenderson.com
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