UK firms are paying off debt for the first time in eight years as rising interest rates slash the appetite for borrowing and strong cash flows are channelled into repaying existing debt, a new survey has revealed.
Company debts in the UK fell 10 per cent on a constant-currency basis in 2021/22 to $521bn, taking their share of the global debt pie to 6.4 per cent, its lowest since the index began in 2014, according the corporate debt index compiled by asset manager Janus Henderson
Analysts at Janus Henderson said asset disposals and booming cash flow at Shell and BP accounted for most of the decline in the UK, but three quarters of British firms also reduced their net debts during the year.
Seth Meyer and Tom Ross, fixed income portfolio managers at Janus Henderson, said the decline in debt had been driven by firms paying off short term debts taken through the pandemic.
“We expect the decline to continue. Economic growth may slow or go into reverse, but companies are starting from a very profitable position so they have strong cash flow and can easily cover their interest expenses,” the two analysts said.
“Plus they are not excessively levered (geared) and do not have major refinancing needs, meaning they are not ‘forced’ borrowers.”
The two analysts said firms will likely weather the downturn and use cash flow to reduce borrowings further “rather than face an existential challenge that might require them to turn to lenders again to see them through.”
Global net debt levels also fell 1.9 per cent to $8.15tn in 2021/22, a reduction of 0.2 per cent on a constant-currency basis, with Janus Henderson predicting debt levels to continue to decline by $270bn in the coming year
The decline in global corporate debt levels, was driven by the energy sector Janus Henderson found, as high prices led oil and gas firms to cut their borrowings by $155bn on a constant-currency basis.