Corporate net debt hit record in 2022/23, but borrowing appetite to decline

By Chiara Elisei

LONDON (Reuters) – Companies around the globe took on a record $456 billion of net new debt in 2022/23, although higher interest rates should reduce appetite for new borrowing ahead, Janus Henderson said in a report published on Wednesday.

The net new debt taken on in 2022/23 pushed outstanding net debt up by 6.2% on a constant-currency basis to $7.80 trillion, surpassing a previous peak in 2020/21, at the height of the COVID pandemic, Janus Henderson’s annual corporate debt index showed.

The index, which monitors 933 large listed non-financial corporates globally, showed that U.S. telecoms group Verizon (NYSE:) became the most indebted firm in 2022/23 for the first time, while Google owner Alphabet (NASDAQ:) remained the most cash-rich company.

One fifth of the net-debt increase reflected companies such as Alphabet and Meta, which owns Facebook (NASDAQ:) and Instagram, spending some of their “vast cash mountains”, Janus Henderson said.

This suggested the rise in debt was “not as worrying,” said James Briggs, fixed-income portfolio manager at the firm, which has $310.5 billion in assets under management.

The report noted that the increase in total debt was more contained at 3% on a constant-currency basis.

While corporate credit quality has held up well so far, it was likely to decline going forward, the report added.

Briggs said the pace of decline would depend on strength in labour markets and the services sector.

Higher interest rates were also expected to dampen appetite for further corporate borrowing and Janus Henderson said it expected net debt to decline by 1.9% in 2023/2024, falling to $7.65 trillion on a constant-currency basis.

The time lag for interest rate increases to filter through also meant that companies were yet to feel a significant impact on their cost of borrowing, the report said.

U.S. firms, that largely rely on fixed-rate bonds as a source of financing, have been particularly shielded so far, with the collective interest bill being flat year-on-year, it added.

In Europe, where a larger part of financing comes from banks, firms have started feeling the pinch from the fastest tightening cycle in a decade and the amount spent on finance costs rose by a sixth at constant exchange rates.

“The increase in interest rates will feed through into the weaker cohort of credit quality much quicker than in investment grade (bonds),” Briggs said.

“We’re also expecting more distress in private markets and leveraged loans compared to high yield.”