Corporate net debt seen rising as companies spend pandemic cash piles

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(Reuters) – Global corporates’ net debt will increase by as much as $600 billion this year as they start to spend some of the cash piles accumulated during the pandemic, a study by asset manager Janus Henderson said on Wednesday.

Companies borrowed a record $1.3 trillion last year but took a cautious approach towards 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 for the 2020 financial year, while net debt – calculated as total debt minus cash – rose only marginally to $8.3 trillion.

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

That anticipated splurge will see global net corporate debt rise by $500-$600 billion by year-end to $8.8-$8.9 trillion, the study predicted.

However Janus Henderson said the improvement in credit quality with economic recovery and supportive monetary policy, despite the prospect of higher inflation, offered investment opportunities.

In particular, high yield debt, dubbed junk bonds, have outperformed this year as it is less sensitive to moves in underlying rates. [xnL1N2L60EG]

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

“Certainly, debt has risen, but cash has soared, markets are wide open, and free cash flow is accelerating, so companies have a fair wind in their sails.”

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

They predicted too that default rates would stay low, possibly below 1% and rise only slightly in 2022, though they highlighted sectors such as airlines and leisure as vulnerable.