Net corporate borrowing around the world will increase by $1 trillion in 2020 as the coronavirus pandemic is further increasing companies’ need for debt financing, according to research by Janus Henderson Investors.
Global corporate debt had already surged to a record $8.3 trillion in 2019 before start of the pandemic, 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.
At the end of 2019, the largest 900 non-financial companies globally owed almost two fifths (37%) more than they did in 2014, while pre-tax profits for the same group of companies only rose a collective 9.1%. Even though interest rates are at record lows, the proportion of profit devoted to servicing interest payments still rose to a new high.
More bond issuance ahead
Collectively net debts jumped by $625 billion last year. Even though this was by far the largest increase over the last five years, it will easily be dwarfed by the surge in borrowing expected for 2020. As the Covid-19 pandemic struck, the sample of 900 companies 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%.
However, 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.
Tom Ross, Corporate Credit Portfolio Manager at Janus Henderson, expects bond issuance to continue to rise. ‘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,’ he said.