Global corporate net debt falls for the first time in 8 years

Companies around the world are repaying debts for the first time since 2014/15, according to the latest annual Janus Henderson Corporate Debt Index. Operating profits rose 51.4% to a record $3.36 trillion in 2021/22, driving a significant increase in cash flows that provided for capital expenditure, record dividends, share buy-backs and debt servicing and repayment. As a result, net debt fell 1.9% to $8.15 trillion in 2021/22, a reduction of 0.2% on a constant-currency basis.

Just over half of companies (51%) globally reduced debts; those outside the United States were more likely to do so, with 54% reducing net borrowings. One quarter of the companies in Janus Henderson’s index have no debts at all; this group collectively has net cash of $10 trillion, half of which belongs to nine large companies. These include technology-driven companies across a range of sectors, such as Alphabet, Samsung, Apple and Alibaba.

Measures of debt sustainability improved sharply in 2021/22, with the global debt to equity ratio falling by 5.7 percentage points to 52.6%, and three quarters of sectors seeing improvement. The proportion of operating profit consumed by interest expenses fell to its lowest on the index’s eight-year record – just 11.3%, owing to low rates and strong profit margins.

For the year ahead, Janus Henderson expects indebtedness to fall further as higher funding costs and an economic slowdown push companies to be more conservative. Janus Henderson estimates that net debts will fall by $270bn (-3.3%) on a constant-currency basis to $7.9 trillion by this time next year. 

Largest debt reductions in energy, mining and car sectors 

The biggest shift was seen in the energy sector; oil and gas producers cut debt by $155bn, down by one sixth year-on-year as rocketing energy prices drove a significant turnaround in the sector’s fortunes. Booming cash flow among the world’s mining companies meant debts were reduced by one quarter. Elsewhere, shortages of components restricted car sales but drove a higher margin sales mix, leading to a reduced need to fund consumer finance programmes among car manufacturers. 

Investment opportunities for bond holders 

In the bond markets, corporate bond yields have risen sharply, especially in the high-yield segment, raising the cost of issuing new bonds. Companies are responding by redeeming bonds; the face value of listed bonds has reduced by $115bn since early June 2021. There is now much greater differentiation between high- and low-risk issuers, between sectors and between different maturities of debt, presenting real opportunities for active fund managers like Janus Henderson. Most sectors are facing headwinds, so portfolio managers are seeking lower risk options in more defensive sectors, whilst remaining selective.