Global corporate debt swells to record and set to accelerate

A flight to quality has made it more expensive for riskier companies to borrow while reducing the cost of finance for the highest-rated borrowers

Corporate debt

Growth of corporate debt is expected to accelerate by US$1trn this year after last year surging by their fastest rate in five years.

Companies were in hock to the tune of US$8.3trn in 2019, up 8.1% year-on-year to the highest level ever recorded, according to research by Janus Henderson. 

Debts have risen significantly faster than profits over the last five years, with measures of debt affordability and sustainability deteriorating to multi-year lows in 2019 despite few signs of corporate stress.

In 2020 the fund management group fixed income investment team’s analysis of the bond market has indicated a sharp increase in borrowing to meet challenges posed by the coronavirus pandemic.

After companies in the index of 900 companies borrowed US$384bn on bond markets between in the first five months of 2020, the report's authors predicted this will almost be tripled by the end of the year.

They noted that as the recession takes hold around the world, profits and cash flow will be much lower, while borrowing needs will be large. 

“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.” 

As net corporate debts soars to another new record in 2020, a flight to quality has made it more expensive for riskier companies to borrow while reducing the cost of finance for the highest rated borrowers.

“As bond investors, we care most about a company’s ability to repay its debts,” the Janus team said. 

“Most importantly we will be looking for signs that a company is strengthening its position when conditions improve. This pushes bond prices higher, generating capital gains for investors. 

“For active fund managers 2020 presents interesting opportunities.”

UK corporate debt stood at US$539bn for 2019, according to the research, up from US$492bn a year ago and US$406bn in 2014.

This compares to US$1.9trn for the rest of Europe last year, both of which are eclipsed by North American’s US$4.2trn of debt.

The most indebted company in the world is Volkswagen, with four other car manufacturers in the top ten. 

The German carmaker’s US$192bn of net borrowing, which includes its financing arm, is not far behind the sovereign debt of South Africa or Hungary.

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