Companies Paying Record Interest Bills As Global Debt Continues To Rise

⦁ Companies paid a record $458bn in interest in 2023/24, up 24.4% year-on-year
⦁ Japanese companies saw interest bill rise fastest, but overall burden stayed low
⦁ European company interest bills surged for 2nd year and US firms are now feeling the effects
⦁ Profit margins are high so record interest costs are affordable for most
⦁ Growth in borrowing slowed markedly
⦁ Takeovers drove half the increase in borrowing - especially in pharma sector
⦁ Vehicle manufacturers took on large new debts to finance sales
⦁ Big 7 US technology stocks saw cash pile rise by $52bn, despite huge shareholder distributions
⦁ Rising costs meant fewer companies added to borrowings in 2023/24

Higher interest rates really began to bite in 2023/24, according to the latest annual Global Corporate Debt Index from Janus Henderson. In 2023/24, the amount the world's largest listed companies spent on interest payments surged by a quarter (+24.4% constant currency), paying banks and bondholders a record total of $458bn, up by $89bn year-on-year. Debt service costs are at record levels in every country in the index and in every sector.

Japanese companies saw interest bill rise fastest, but overall burden stayed low
The fastest increase came in Japan, where rate increases from near-zero levels have pushed interest costs up by two fifths year-on-year (+39%); they are now more than double their 2020/21 total. Debt levels are, however, relatively small in Japan compared to the size of the economy, corporate balance sheets are not highly geared and rates remain very low.

European company interest bills surged for 2nd year and US firms are now feeling the effects
European interest costs jumped 28% on a constant-currency basis in 2023/24, a second consecutive year of rapid increases, despite debt levels being roughly flat for five years. Companies in the region are now footing an interest bill 54% larger than in 2020/21. It has taken much longer for US companies to feel the effects of higher interest rates owing to more long-term financing via bond market - after escaping almost unscathed in 2022/23, their collective interest bill jumped by more than a fifth (+23%) in 2023/24 as bonds were steadily refinanced at higher interest rates.

Profit margins are high so record interest costs are affordable for most
Higher interest costs consumed one eighth (12.4%) of operating profits in 2023/24, up markedly from one ninth in 2022/23. Despite the increase they have, however, merely returned to a level consistent with the long-run average. They are likely to take a bigger bite in the year ahead.

Growth in borrowing slowed markedly
The world's largest listed companies took on $378bn of net new borrowing in 2023/24, pushing the total up 4.9% on a constant-currency basis to a record $8.18 trillion. This increase was, however, significantly lower than in 2022/23 and was also well below 2018 and 2019 (2020 and 2021 saw borrowing patterns disrupted by the pandemic). Higher interest rates have clearly been a factor in moderating appetite to borrow over the last year.

Takeovers drove half the increase in borrowing - especially in pharma sector
Takeovers were the major driver of the increase in corporate net borrowing. Big deals in the healthcare sector alone accounted almost one third of the rise, including Pfizer's purchase of Seagen. Across all sectors, Janus Henderson estimates that takeovers net of disposals accounted for around half of the increase in global net borrowing in 2023/24.

Vehicle manufacturers took on large new debts to finance sales
Another one quarter of the increase came from the world's vehicle manufacturers. They have enjoyed rising sales, with profits up by more than a quarter year-on-year. This has significantly increased their working capital need, in particular related to finance provided to customers. As a result, Volkswagen regained its position as the world's most indebted company during the year.

Some companies borrowed to pay dividends and buybacks
Some companies from a range of sectors, such as Chevron, Engie, Equinor, BHP and RTX, had insufficient cash flow to cover promised dividends and share buybacks and so borrowed the difference.

Big 7 US technology stocks saw cash pile up
Meanwhile, the enormously strong cash flows from the Big 7 technology companies in the US meant their collective net cash balance grew by $52bn during the year, despite spending an astonishing $210bn between them on dividends and share buybacks. Google remained the most cash-rich company in the world.

Overall fewer companies added to borrowings in 2023/24
Just over half the companies in the index (53%) increased the amount they owe in 2023/24, down from 57% the year before as higher interest rates discouraged more of them from additional borrowing.

Outlook
Janus Henderson expects borrowing levels to continue to rise in 2024/25 but at an even slower pace, up by 2.5% to a record $8.38 trillion. The cost of debt servicing will continue to grow even as central banks cut interest rates as cheaper older debt is refinanced at new higher rates.

Tim Winstone, Portfolio Manager on the Corporate Credit Team at Janus Henderson said:"The sharp increase in the amount companies spent on interest in the past year marks a sea change in corporate finances. The trend is evident everywhere but it's important to remember debt servicing costs are coming from a historically low base so this is a process of normalisation. But even if central bank policy rates start to fall this year, we expect to see interest bills continue to rise for the time being as old debts continue to mature and refinance at higher rates. On the whole, companies are absorbing these higher interest costs with little difficulty, though the impact is greater for smaller firms that often face a refinancing cliff edge, than for larger ones that typically have a range of maturities for their debts and so see a more gradual shift to higher interest bills.

"In the bond markets, we feel that spreads have narrowed too far for riskier borrowers, for long maturities and for USD corporate bonds in particular. Investors might focus on investment grade companies, especially in regions like Europe where spreads are more attractive. Investors might consider non-cyclical industries at present, because companies in highly cyclical industries, like mining, are enjoying unjustifiably narrow spreads given the higher risk to their earnings.

"We are optimistic for the year ahead. Economies have weathered higher rates well and seem to be landing relatively softly. As the rate cycle finally turns downwards, we believe bonds will perform well as yields fall, driving capital returns for investors."

Press Enquiries

Janus Henderson Investors
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