Borrowing levels expected to continue rising
Amid high interest rates, corporate borrowing reached a new record in the 2023/24 financial year, according to the latest annual Global Corporate Debt Index from Janus Henderson Investors.
The world’s largest listed companies added US$378 billion in net new borrowing, a 4.9% increase on a constant-currency basis, bringing the total to a record US$8.18 trillion. This rise was significantly lower than in 2022/23 and was also below the levels seen in 2018 and 2019.
In Australia, net borrowing increased by 59.9% on a constant-currency basis, primarily due to CSL’s acquisition of Vifor and BHP’s dividends exceeding free cash flow. Other companies made smaller contributions.
Interest costs in Australia also rose by 24.5% and are expected to rise more sharply in the current financial year due to higher debt levels.
Japanese companies experienced the fastest rise in interest bills, though their overall burden remained low. European company interest bills surged for the second consecutive year, and US firms began to feel the effects.
Takeovers, particularly in the pharmaceutical sector, drove half the increase in borrowing. Vehicle manufacturers also took on significant new debts to finance sales. Despite record interest costs, high profit margins have made these costs affordable for most companies.
Janus Henderson expects borrowing levels to continue rising in 2024/25 but at a slower pace, increasing by 2.5% to a record US$8.38 trillion. Debt servicing costs are expected to grow even as central banks cut interest rates because older, cheaper debt will be refinanced at higher rates.
“Record interest payments for companies led to opportunities for investors to earn healthy levels of income from corporate debt markets over the past year,” said Shan Kwee (pictured above left), portfolio manager on the Australian fixed interest team at Janus Henderson Investors. “In Australia, we have seen a diverse range of companies revisit the market willing to borrow at elevated interest levels. Debt issuance from non-bank corporate companies in Australia reached A$29 billion in FY2024, almost doubling issuance versus the prior year, and the highest volume of issuance since FY2021.
“Most well-established, investment-grade companies in Australia have managed their debt profiles well through the period of lower interest rates, having termed out maturities and hedged much of the impact of rising rates to date.
“They have also experienced stronger profitability and earnings growth in recent years and are well-positioned to navigate a slower phase of growth and still readily pay the higher interest today. We prefer to avoid the SME sector, where evidence of distress is increasing, especially with Australian insolvencies hitting a record monthly high in May 2024.”
Tim Winstone (pictured above right), portfolio manager on the corporate credit team at Janus Henderson Investors, added that the sharp increase in the amount companies spent on interest in the past year marks a sea change in corporate finances.
“The trend is evident everywhere, but it is important to remember debt servicing costs are coming from a historically low base, so this is a process of normalisation,” Winstone said. “Even if central bank policy rates start to fall this year, we expect to see interest bills continue to rise as old debts mature and refinance at higher rates. Overall, companies are absorbing these higher interest costs with little difficulty, though the impact is greater for smaller firms facing a refinancing cliff edge than for larger ones that typically have a range of maturities for their debts.
“In the bond markets, we feel that spreads have narrowed too far for riskier borrowers, long maturities, and USD corporate bonds in particular. We prefer to focus on investment-grade companies, especially in regions like Europe where spreads are more attractive. We also favour non-cyclical industries because companies in highly cyclical industries, like mining, are enjoying unjustifiably narrow spreads given the higher risk to their earnings.
“We are optimistic for the year ahead. Economies have weathered higher rates well and seem to be landing relatively softly. As the rate cycle finally turns downwards, bonds will perform well as yields fall, driving capital returns for investors.”
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