Companies took on $456bn of net new debt globally in 2022/23, driving borrowing up 6.2% to a record $7.8trn.
However, Janus Henderson’s annual Corporate Debt Index noted that a fifth of the increase came from firms such as Meta and Alphabet spending some of their huge cash reserves. Total debt, which excludes cash balances, ticked up 3%.
Pre-tax profits across the globe (excluding financials) rose 13.6% to $3.62trn, another record. However, nine-tenths of the increase came from oil producers, with media, mining and telecoms all recording lower year-on-year profits.
US telecoms firm Verizone became the most indebted company in the world, excluding financials.
Janus Henderson fixed income portfolio managers James Briggs and Michael Keough said: “Debt levels may have risen but they are very well supported, and the global economy has remained remarkably resilient. This resilience and the extraordinarily high levels of profitability companies have enjoyed in the last two years reflect vast sums of government deficit spending and central bank liquidity stimulus during the pandemic.
“The surge in interest rates needed to quell the resulting inflation is succeeding in most parts of the world, but it is not at all clear when and to what extent the economy will suffer the more painful consequences – higher unemployment and lower profits.”
See also: Grade expectations: Will investors return to UK corporate bonds?
‘Exciting times’ for corporate bond investors
While cash flow fell 3% from record highs in 2021/22, it did not impact shareholder pay-outs as firms dished out $2.1trn in dividends and share buybacks.
This marked the highest ever level for dividends and a $400bn increase on the previous year.
Briggs and Keough added that despite the outlook for both the global economy and corporate earnings being unclear, the return of income yield is attracting further corporate bond investors.
In May, the average yield on investment-grade bonds was 4.9%, rising from 4.1% a year ago and 1.7% in May 2021.
“For companies, higher interest costs will gradually increase pressure for the foreseeable future, affecting some more than others depending on their creditworthiness and the structure of their borrowings,” they said.
“All this means exciting times for corporate bond investors. Most obviously, higher interest rates mean ‘income’ is back as a theme. Investors can now lock into meaningful levels of income for the first time in years.
“Not only that, but when market interest rates fall to reflect lower inflation and a slowing economy, bond prices rise, generating capital gains too. Central banks are likely to start cutting rates in 2024.”
