The Janus Henderson Corporate Debt Index – a long-term study into trends in company indebtedness around the world – shows that companies took on record new debts totaling $1.3 trillion in 2020 as global profits plunged by a third and companies raised cash to ensure they could weather the global recession.

Key Takeaways

• Total corporate debt soared 10% to a record $13.5 trillion in 2020. However, between January and June 2021, companies have borrowed almost no further cash as developed nations look beyond the pandemic.
• Furthermore, companies have not spent any of this new borrowing as they have preserved cash through the pandemic, so net debt (total debt minus cash) has not increased.
• Businesses are starting to deploy their collective $5.2 trillion cash pile; we expect to see growth in capital expenditure, dividend payments and share buybacks through H2 2021 and beyond.
• Improving credit fundamentals and ultra-loose monetary policy offer opportunities for bond investors, particularly identifying redeemed “fallen angels” and “rising stars” in the high yield category.

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As lockdowns began in 2020, the fog of uncertainty was dense. Bond markets were initially spooked by the scale of the crisis, but as central banks stepped in to calm the waters, liquidity improved, and interest rates fell sharply. Companies instantly took the opportunity to issue bonds in case it became impossible later on.

All the new borrowing totaled $1.3 trillion dollars, a record annual increase. Companies also took action by slashing dividends, halting share buy-back programs, cutting capital expenditure, seeking cash injections from shareholders, and selling assets. As a result, they did not spend this new debt. This means that cash holdings have soared by an astonishing $1.1 trillion to a record $5.2 trillion, increasing almost twice as much in one year as in the previous five years combined.

All this thrift meant that global corporate net debt only was almost unchanged after adjusting for exchange rates. Moreover, only two fifths of companies in our index increased their net debts, compared to more than half in 2019, and measures of debt sustainability look comfortable. The result has been a positive environment for the corporate bond market despite the size of the economic downturn, which saw profits for companies in our index drop by almost a third.

Even in normal times, different sectors have very different financing needs. But the uneven impact of a pandemic on different industries meant widely divergent borrowing patterns in 2020. Transport and leisure companies were forced to borrow to cover their high fixed costs in the face of revenues decimated by restrictions on movement. Airlines, cruise lines and resort companies were all among the hardest hit. The big oil sector borrowed relatively little given how far oil prices fell because companies took action to reduce outgoings or raised cash by disposing of assets.

A number of sectors reduced their debts. Those under stress, like general retail, did so mainly by raising new cash from shareholders, while others, like technology, simply traded well. Companies in North America owe half the world’s corporate debt but own only two fifths of the world’s corporate assets, reflecting a greater appetite to borrow than companies in other parts of the world.

Many companies took the opportunity to refinance short-term debt for cheap long-term loans. Companies in Europe account for a quarter of the world’s net debt, but after adjusting for exchange rates, the total was almost unchanged in 2020. Car manufacturers, whose huge finance operations make them among the largest borrowers in the world, saw their borrowing fall as their sales declined. British companies worked hard to preserve or raise cash through the crisis and held their net debt steady, while Asian companies collectively repaid debt during the pandemic.

2021 is looking very exciting. As economic growth rebounds, the big question is what companies will do with their record cash holdings. The 2020 reduction in capex was certainly transitory, so we think an investment boom is highly likely after the freeze last year. As this cash is spent, net debts will once again climb. This will account for a large portion of the reduction in cash balances but share buybacks and higher dividends will be part of the story, too.

We expect net debt to rise by $500 to $600 billion this year for bond investors. For bond investors, there are some really interesting opportunities. The prospect of higher economic growth and rising inflation is usually considered negative for fixed income, but it also means improving credit fundamentals. Rising interest rates raise concerns about the future returns of bond portfolios, but it is important not to let fear of higher rates dragging on returns prevent investors from capitalizing on the potential opportunities.

Crucially, the corporate bond markets are not a single, uniform asset class. The high yield market is in a constant state of flux. At one end, there are bonds churning back and forth between investment grade and high yield. At the other end, bonds are on the brink of default. All the while, there are hundreds of different companies jostling for position along the credit spectrum. As these positions change, bond prices move. Those going up the rankings – the rising stars – see the interest rates they must pay decline, the yield on their bonds fall and the price rise, generating capital gains for investors.