DENVER & LONDON – (COMMERCIAL THREAD) – Companies around the world took on record new debt totaling $ 1.3 trillion in 2020, as global profits fell by a third, according to the annual Janus Henderson Corporate Debt Index . Total debt (which does not account for cash) jumped 10.2% to a record high of $ 13.5 trillion in fiscal 20201, as companies raised liquidity to ensure they could weather the global recession and any potential restrictions on access to financial markets.
However, companies have spent next to none of this new debt and have issued virtually no additional debt in 2021 to date. Janus Henderson’s analysis of global corporate bond markets shows total borrowing only increased by 1% in the first six months of 2021.
Such an economy has meant that global corporate net debt (total debt minus cash) only grew by $ 151 billion, ending the year at $ 8.30 trillion (up from $ 8.15 trillion il a year ago). Adjusted for exchange rate fluctuations, the increase was only $ 36 billion.
For 2021, Janus Henderson expects total debt to remain broadly stable, but net debt will grow rapidly as companies start spending some of their mountain of cash. Net debt is expected to increase by $ 500 billion to $ 600 billion this year to reach $ 8.8 trillion to $ 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 creates a favorable environment for both supply and demand for ‘high yield bonds.
Companies will deploy “cash war caches” to fund investments, dividend payments and share buybacks
Hard work to cut spending has meant that most new borrowing is still found on companies’ balance sheets in the form of cash or securities. Cash holdings climbed $ 1.1 trillion to a record $ 5.2 trillion in 2020, growing almost twice as much in one year as in the previous five years combined.
Rather than spending new loans, companies have instead taken steps to strengthen their balance sheets. Companies in the Janus Henderson Corporate Debt Index cut dividends to the tune of $ 130 billion, cut capital spending, raised hundreds of billions of dollars from shareholders and asset sales, and reduced share buybacks2. However, as the recovery continues, Janus Henderson predicts a boom in investments, dividend payments and share buybacks through the second half of 2021 and beyond.
Investment Opportunities for Redeemed Fallen Angle Bondholders in the High Yield Sector
For bond investors, there are attractive opportunities as credit quality improves, especially in the high yield segment. Janus Henderson sees significant opportunities to identify rising stars in the coming year, including the rehabilitation of some of the fallen angels from last year. The portfolio managers favor food and beverages, certain automakers, and opportunities in the energy and consumer sectors.
Tom Ross and Seth Meyer, fixed income portfolio managers at Janus Henderson, explained: “Businesses around the world have come through the past 16 months with impressive skill. An investment boom is very likely after the Covid-19 freeze. That will be a big part of the reduction in cash balances this year, but share buybacks and rising dividends will also be part of the story.
“For bond investors, there are some really exciting opportunities right now. The prospect of higher economic growth and higher inflation is generally viewed as negative for fixed income securities, but it also means improving credit fundamentals – better cash flow, better leverage ratios. . Fundamentally, corporate bond markets are not a single, uniform asset class. While the overall borrowing costs are low, businesses still want to move up the rankings because it gets even cheaper. The additional borrowing costs for a BB issuer are 100bp more expensive than for a BBB issuer, just a step above.
Above all, the high yield market is constantly changing. On the one hand, there are bonds that move back and forth between investment grade and high yield. At the other end of the spectrum, bonds are on the verge of default. Meanwhile, hundreds of different issuers are vying for a position on the credit spectrum. As these positions change, bond prices move, creating investment opportunities.
“Strong economic growth can trigger persistently higher inflation, but it’s important not to let the fear of rising interest rates weigh on returns prevent investors from capitalizing on potential opportunities. We believe central banks will maintain their support for the economic recovery by keeping interest rates low and engaging in asset purchases (quantitative easing). This should create a favorable environment for both supply and demand for high yield bonds, creating opportunities for good credit selection. “
On the risk of default, Seth and Tom added: “Default rates have been very low during the pandemic thanks to government support, but we believe they will stay low, perhaps less than 1% this year and only slightly higher next year. Granted, debt has increased, but liquidity has skyrocketed, markets are wide open and free cash flow is accelerating, so companies are on the rise. Pockets of risk remain – airlines, for example, remain vulnerable to unpredictable political decisions regarding international travel. The wider leisure and hospitality sector is also suffering greatly from this uncertainty. “
Unless otherwise indicated, all data is from Janus Henderson Investors as of March 31, 2021. Past performance is no guarantee of future results. International investing involves certain risks and increased volatility that are not associated with investing solely in the UK. These risks included currency fluctuations, economic or financial instability, lack of reliable or up-to-date financial information, or adverse political or legal developments.
Notes to editors
Janus Henderson Group (JHG) is a leading active global asset manager dedicated to helping investors achieve their long-term financial goals through a wide range of investment solutions including stocks, securities fixed income, quantitative equities, multi-asset strategies and alternative asset classes.
As of March 31, 2021, Janus Henderson had approximately $ 405 billion in assets under management, more than 2,000 employees and offices in 25 cities around the world. Based in London, the company is listed on the New York Stock Exchange (NYSE) and the Australian Securities Exchange (ASX).
190% of the balance sheets of companies included in the JHCDI were dated between 12/31/20 and 03/31/21 and were communicated to the Market no later than 24e May 2021
2 In the United States alone, share buybacks fell by $ 111 billion in 2020, source S&P Dow Jones
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