- Total corporate debt soared 10% to a record $13.5 trillion in
2020, but between January and June 2021 companies have borrowed
almost no further cash as developed nations look beyond the
pandemic.
- Companies have not spent any of this new borrowing as they have
preserved cash through the pandemic, so net debt (total debt minus
cash) has not increased.
- Businesses are starting to deploy their collective $5.2
trillion cash pile – Janus Henderson predicts a boom in capex,
dividend payments and share buybacks through H2 2021 and
beyond.
- Money spent means net debt is climbing, even though total debt
is not. Janus Henderson expects net debt to end the year up
$500-600 billion at $8.8-$8.9 trillion.
- Improving credit fundamentals and ultra-loose monetary policy
offer opportunities for bond investors, particularly identifying
redeemed ‘fallen angels’ and ‘rising stars’ in the high yield
category.
The world’s companies took on record new debts totalling $1.3
trillion in 2020, as global profits plunged by a third, according
to the annual Janus Henderson Corporate Debt Index. Total debt
(which takes no account of cash holdings) jumped 10.2% to an
all-time high of $13.5 trillion for the financial year 20201, as
companies raised cash to ensure they could weather the global
recession and any potential restrictions of access to financial
markets.
However, companies have spent almost none of this new debt and
have issued almost no additional debt in 2021 to date. Janus
Henderson’s analysis of the world’s corporate bond markets shows
that total borrowing has only risen 1% further in the first six
months of 2021.
Such thrift has meant that global corporate net debt (total debt
minus cash) only increased by $151 billion, ending the year at
$8.30 trillion (up from $8.15 trillion a year ago). Adjusted for
exchange rate movements, the increase was just $36 billion.
For 2021, Janus Henderson expects total debts to remain broadly
flat, but net debt will climb quickly as companies begin to spend
some of their cash mountain. Net debts are set to rise by $500-600
billion this year to $8.8-$8.9 trillion.
Janus Henderson sees opportunities for bond investors, as the
combination of improving credit fundamentals and central bank
activity in response to the pandemic provides a favourable
environment for both the supply of and demand for high yield
bonds.
Companies will deploy “cash war chests” to fund capex,
dividend payments and share buybacks
The hard work to reduce outgoings has meant that most of the new
borrowing is still sitting on company balance sheets as cash or
securities. Cash holdings soared by $1.1 trillion to a record $5.2
trillion in 2020, increasing almost twice as much in one year as in
the previous five years combined.
Rather than spend new borrowings, companies have instead taken
steps to strengthen their balance sheets. Companies in Janus
Henderson’s Corporate Debt Index cut dividends to the tune of $130
billion, slashed capex, raised hundreds of billions of dollars from
shareholders and from asset sales, and cut share buybacks2.
However, as the recovery continues, Janus Henderson predicts a boom
in capex, dividend payments and share buybacks through H2 2021 and
beyond.
Investment opportunities for bond holders in redeemed fallen
angles in the high yield sector
For bond investors, there are some interesting opportunities as
credit quality improves, especially in the high yield segment.
Janus Henderson sees significant scope to identify rising stars in
the year ahead, including the rehabilitation of some of last year’s
fallen angels. The portfolio managers favour food and beverage,
selected auto manufacturers, as well as opportunities in the energy
and consumer sectors.
Tom Ross and Seth Meyer, fixed income portfolio managers at
Janus Henderson explained: “Companies around the world have
weathered the last 16 months with impressive skill. An investment
boom is highly likely after the Covid-19 freeze. This will account
for a large portion of the reduction in cash balances this year but
share buybacks and higher dividends will be part of the story
too.
“For bond investors, there are some really interesting
opportunities right now. The prospect of higher economic growth and
rising inflation is usually considered negative for fixed income,
but it also means improving credit fundamentals – better cash flow,
improved leverage ratios. Crucially the corporate bond markets are
not a single, uniform asset class. Although overall borrowing costs
are low, companies still want to move up the rankings because it
gets cheaper still. The additional borrowing costs for a BB issuer
are 100bp more expensive than for a BBB issuer, just one notch
above.
Crucially, the high yield market is in a constant state of flux.
At one end, there are bonds journeying back and forth between
investment grade and high yield. At the other end, bonds are on the
brink of default. All the while, there are hundreds of different
issuers jostling for position along the credit spectrum. As these
positions change, bond prices move, creating investment
opportunities.
“Strong economic growth can ignite permanently higher inflation,
but it is important to not let fear of higher interest rates
dragging on returns prevent investors from capitalizing on the
potential opportunities. We believe central banks will maintain
support for economic recovery by keeping interest rates low and
engaging in asset purchases (quantitative easing). This ought to
provide a favourable environment for both the supply and demand for
high yield bonds, creating opportunities for good credit
selection.”
On default risk, Seth and Tom added: “Default rates have
been very low in the pandemic thanks to government support, but we
think they are going to stay low, perhaps less than 1% this year
and only slightly higher next. Certainly, debt has risen, but cash
has soared, markets are wide open, and free cash flow is
accelerating, so companies have a fair wind in their sails. Pockets
of risk remain – airlines, for example, remain vulnerable to
unpredictable policy decisions on international travel. The wider
leisure and hospitality sector suffers a lot of this uncertainty
too.”
-ends-
Unless otherwise stated all data is sourced by Janus Henderson
Investors as of 31 March 2021. Past performance is no guarantee of
future results. International investing involves certain risks and
increased volatility not associated with investing solely in the
UK. These risks included currency fluctuations, economic or
financial instability, lack of timely or reliable financial
information or unfavourable political or legal developments.
Notes to editors
Janus Henderson Group (JHG) is a leading global active asset
manager dedicated to helping investors achieve long-term financial
goals through a broad range of investment solutions, including
equities, fixed income, quantitative equities, multi-asset and
alternative asset class strategies.
At 31 March 2021, Janus Henderson had approximately US$405
billion in assets under management, more than 2,000 employees, and
offices in 25 cities worldwide. Headquartered in London, the
company is listed on the New York Stock Exchange (NYSE) and the
Australian Securities Exchange (ASX).
190% of company balance sheets incorporated into the JHCDI were
dated between 31/12/20 and 31/03/21and were reported to the Market
by 24th May 2021
2 Share buybacks in the US alone fell by $111bn in 2020, source
S&P Dow Jones
This press release is solely for the use of members of the
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financial advisers or institutional investors. We may record
telephone calls for our mutual protection, to improve customer
service and for regulatory record keeping purposes.
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