Australian corporate debt dives 20%-plus

Within their latest annual index of global corporate debt, Janus Henderson reveals that corporate debt in Australia fell -21.5% in the past financial year.

The global asset manager was also quick to remind investors that the flow of cash to mining companies over the past year has helped reduce Australia’s overall corporate debt.

For example, a significant reduction in debt at BHP (ASX: BHP) alone accounted for 40% of the overall result.

BHP first flagged the need for debt reduction back in 2016 when debt was almost US$2bn higher than the US$24.4bn announced one year earlier.

Fast forward to the half year ending 31 December 2021 and the big miner had net debt on balance sheet of US$6.1bn.

Eight-year low

Key findings within the latest report reveal a major fall - to an eight-year low - in Australian companies debt-to-equity ratio, down -18 percentage points to -45.7%, which Janus Henderson attributes to significant profit recovery.

The survey once again revealed miners, together with oil firms and automotive manufacturers dominating the list of companies reducing debts.

In light of an economic slowdown, especially following a major post-pandemic rebound, Janus Henderson expects corporates in Australia to take a more bearish approach to debt and the accumulation of new debt.

Next commodity super cycle

While the asset manager’s head of Australian fixed interest, Jay Sivapalan expects Australia to play an integral role in global electrification and a net zero world, he believes we’re up to five years away from that new wave of investment, leading to the next commodity supercycle.

While mainstream corporate Australia is in pretty good shape, Sivapalan believes the private credit market is becoming more susceptible to underlying weakness due to borrowing extremely cheap money during more buoyant times.

“Now they’re having to focus on the cost of that debt, and also being able to repay that debt,” Sivapalan told The Australian.

Real estate & property development most exposed

Looking across the market, Sivapalan identifies real estate construction and property development as having the biggest private credit related vulnerabilities.

Without access to cheap money and the withdrawal of benign central bank policy, he expects to see higher levels of corporate defaults over the next 12-18 months.

“I think the next year will really separate those that have been prudent versus those that have really gone with the theme, and the demand that they saw coming and didn’t really plan for a change in that state,” Sivapalan noted.