The world’s biggest companies are set to borrow as much as $1 trillion (£790bn) this year as they try to weather the coronavirus crisis, according to one of the City’s biggest asset managers.
The world’s 900 biggest companies borrowed an additional $384bn between January and May by issuing bonds as they scrambled to strengthen their finances, Janus Henderson’s corporate debt index showed.
And firms are set to borrow much more as they brace themselves for a possible second wave of coronavirus infections, the asset manager said.
The corporate debt index looks at the 900 largest non-financial firms in the world. It showed that companies borrowed a record amount in 2019.
Net debts jumped by $625bn last year, Janus Henderson said. That was easily the biggest increase in the last five years. It took the net borrowings – total debt minus cash – of the index to a record $8.3 trillion.
It funded mergers and acquisitions, share buy-backs, dividends and investment.
Seth Meyer, a portfolio manager at Janus, told City A.M. that some firms may now regret borrowing so much.
“If you were a company that put on a lot of debt in 2019, you would have preferred not to do that coming into 2020 given what we’ve seen.”
Yet he said debt levels were not necessarily a problem given that interest rates are so low.
As economies have been ravaged by coronavirus, firms have looked to borrow record amounts to ensure they have spare cash.
Janus Henderson estimated net borrowing will jump by up to $1 trillion this year. That would add 12 per cent to the debt of the world’s biggest firms.
Firms now borrowing to strengthen balance sheets
“The vast majority of the money that is being issued today is basically to sit on the balance sheet,” Meyer said.
“Just as an individual if you were thinking the future is uncertain, you’re going to raise your own cash balance,” he said. “For companies it’s going to be the same thing.”
Company borrowing has been boosted in recent years by central banks’ record low interest rates.
The firms on the index today owe almost 40 per cent more than they did in 2014, the index showed. Yet pre-tax profits have risen 9.1 per cent in that time.
The corporate debt index showed that Germany’s Volkswagen was the most indebted company in the world in 2019. It owed an enormous $192bn. That is not far behind the sovereign debt of South Africa or Hungary.
US telecoms giant AT&T is the second-most indebted firm on the index. It owed $176bn in 2019.
Some firms on the index do not borrow, however. Google-owner Alphabet had the biggest cash reserves in 2019, with $104bn.
The huge increase in debt in 2020 could pose problems for companies in the coming months or years.
Meyer said the “million dollar question” was whether the economy and companies grow enough for firms to easily pay back the debt incurred during coronavirus.
“The biggest risk to the added leverage on these companies’ balance sheets is really how long we stay in this low growth environment and don’t recover,” he said.