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COVID-19 Inviting New Global Corporate Debt Worth $1 Trillion In 2020: Report
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India, 14 July 2020 9:17 AM GMT
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Companies included in the new debt index already owe nearly 40% more than they did in 2014, and growth in debt has surpassed growth in profits.
As companies try to increase their finances against the coronavirus, they are likely to get submerged in a new debt worth $1 trillion in 2020, a new study of 900 top firms has found.
The unprecedented increase will witness a jump by 12% to around $9.3 trillion in the total global corporate debt, as per the report.
Last year witnessed a sharp 8% rise, driven by mergers and acquisitions. However, this year's spike will be for preservation as the virus depletes profits.
"COVID has changed everything," Seth Meyer, a portfolio manager at Janus Henderson said. "Now it is about conserving capital and building a fortified balance sheet."
Meyer estimates that the recent weeks have set a new record for debt issuance from riskier "high yield" firms with lower credit ratings.
Companies included in the new debt index already owe nearly 40% more than they did in 2014, and growth in debt has outstripped growth in profits.
Pre-tax profits for the same 900 companies have increased a collective 9.1% to $2.3 trillion.
US companies owe almost half of the world's corporate debt at $3.9 trillion and have seen the quickest hike in the last five years of any major economy. Germany is at number two at $762 billion with three of the world's most indebted firms including Volkswagen with $192 billion of debt.
In contrast, a quarter of the companies in the new index have no debt at all and some have vast cash reserves, like the Google's owner Alphabet.
Meyer said credit markets still had some way to return to pre-COVID conditions and the ongoing threat of the virus, especially the recent surge in US cases, which is a point of concern for investors
"It is all a recipe for a more challenged outlook than we thought two months ago," he said.
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