Corporate Net Debt Rises As Businesses Spend Pandemic Cash

Global corporations’ net debt will rise to $ 600 billion this year as they begin to spend some of the cash accumulated during the pandemic, a study by asset management firm Janus Henderson said on Wednesday.

Businesses borrowed a record $ 1.3 trillion last year, but took a cautious approach to spending it, which left them sitting on some $ 5.2 trillion in cash, Janus Henderson said .

As a result, total debt climbed 10.2% to a record $ 13.5 trillion in fiscal 2020, while net debt – calculated as total debt minus cash – increased only slightly. to reach $ 8.3 trillion.

With the economic recovery taking hold, the company expects a boom in capital spending, dividend payments and share buybacks in the second half of this year and beyond.

This anticipated madness will see global corporate net debt rise from $ 500 billion to $ 600 billion by the end of the year to $ 8.8 to $ 8.9 trillion, according to the study.

However, Janus Henderson said improving credit quality with the economic recovery and favorable monetary policy, despite the prospect of higher inflation, presented investment opportunities.

In particular, high yield debt, known as junk bonds, has outperformed this year because it is less sensitive to changes in underlying rates.

“The prospect of higher economic growth and rising inflation… also means improving credit fundamentals – better cash flow, improved debt ratios,” said fixed income portfolio managers Tom Ross and Seth Meyer.

“Sure, debt has increased, but liquidity has skyrocketed, markets are wide open and free cash flow is accelerating, so businesses are on the rise.”

They are betting on the recovery of some of last year’s “fallen angels” – in other words, companies that lost their investment grade during the pandemic, especially food and beverage companies, such as as Kraft, and some automakers, such as Ford. .

They also predicted that default rates would remain low, perhaps below 1%, and only increase slightly in 2022, although they highlighted sectors such as airlines and entertainment as vulnerable.