Corporate borrowing hits all-time high despite interest rates

The world's largest listed companies took on US$378 billion of net new debt last financial year, driving corporate debt to an unprecedented US$8.18 trillion, according to Janus Henderson's latest corporate debt index.

While significant, the increase was notably lower than in 2022/23 and remained below the borrowing levels of 2018 and 2019.

Janus Henderson said the rise in interest rates appears to have been a factor in "moderating appetite" to borrow.

Nevertheless, takeovers were the major driver of the increase in corporate net borrowing.

Deals in the healthcare sector, including Pfizer's purchase of Seagen, accounted for nearly one third of the rise. However, across all sectors, Janus Henderson estimated that takeovers net of disposals contributed to about half of the increase in global net borrowing last financial year.

The asset manager's annual corporate debt index is a long-term study into global company indebtedness that scrutinises the extent to which big players are financing themselves with borrowings and questioning the sustainability of these debts.

In Australia, net borrowing increased by 59.9% on a constant-currency basis to US$74 billion, due to CSL's acquisition of Vifor and BHP's dividends exceeding free cash flow significantly. Interest costs rose by 24.5% and are expected to rise more sharply in the current financial year, reflective of higher debt.

Meanwhile, the report said that although higher interest rates have taken some time to filter through to company operations, the impact has now really begun to bite. Last financial year, the amount companies spent on interest payments surged by 24%, reaching a record total of US$458 billion - a year-on-year jump of US$89 billion. Debt service costs have hit record levels in every country.

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 US$8.38 trillion. It said 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.

Janus Henderson portfolio manager Tim Winstone 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."