Companies the world over are suddenly paying back more debt than they are taking on, according to a long-term study. The banks' traditional lending business is suffering as a result.
For the first time in seven years companies around the world are repaying more debt than the debt they are taking on, the latest annual Janus Henderson Corporate Debt Index wrote.
This comes after corporate profits rose to record high levels worldwide in the past financial year, resulting in companies paying out lavish dividends to shareholders or buying back shares. However, this year company managers significantly reduced their companies' debt, as Janus Henderson report on corporate debt shows.
Shining Example
Global net corporate debt fell by 0.2 percent to $8.15 trillion in 2021/22 on a constant currency basis. A decline, which according to the authors, is likely to continue. In Europe, debt declined especially in Norway, Italy and Switzerland.
In Switzerland, the currency-adjusted debt of local companies fell by 9.6 percent, according to the analysis, which is mainly related to the disposal of assets in the healthcare sector.
Overall, the net debt of Swiss companies amounted to $88 billion, according to the investment company's calculations. This sum represents only 5 percent of the total European corporate debt (excluding the UK) of $1.95 trillion.
More debt sustainable
The report goes on to show that the global debt-to-equity ratio fell by 5.7 percentage points to 52.6 percent. Interest costs as a percentage of operating income fell to 11.3 percent, the lowest level in eight years, due to low-interest rates and good profit margins.
The report makes clear that the costs of companies for issuing new bonds have risen significantly compared to the same period last year, as the bond markets have absorbed rising inflation, higher central bank inflation, higher central bank rates, and the expectation of further rate hikes.
Less for lenders
The average yield on investment-grade bonds was 4.1 percent at the end of May 2022, up from 1.7 percent a year earlier. The average yield on high-yield bonds had risen even more, to 6.9 percent, compared to 4.0 percent.
According to the study's authors, companies are healthy overall and can still easily pay interest. What's more, because of high savings and low unemployment, there is much to suggest that companies will be able to weather the downturn and use the large cash flows to further reduce debt.
Yet for banks and other lenders, the bottom line is that there are no new growth opportunities in lending.
How Much Debt is Good?
An acceptable level of debt depends primarily on geography and industry. Wealthy companies with secure cash flows in economically and politically stable parts of the world can maintain higher debt levels than companies in highly cyclical industries, with limited tangible assets, or in less developed parts of the world. Cultural factors also play a role, as does the prevailing inflation and interest rate environment.
