LONDON • Companies around the world will take on as much as US$1 trillion (S$1.39 trillion) of new debt this year, as they try to shore up their finances against the coronavirus, a new study of 900 top companies has estimated.

The unprecedented increase will see total global corporate debt jump by 12 per cent to around US$9.3 trillion, adding to years of accumulation that has left the world's most indebted companies owing as much as many medium-sized countries.

Last year also saw a sharp 8 per cent rise in debt, driven by mergers and acquisitions (M&A), and by businesses borrowing to fund share buybacks and dividends. However, this year's jump will be for an entirely different reason - preservation as the virus saps profits.

"Covid has changed everything," said Mr Seth Meyer, a portfolio manager at Janus Henderson, the firm that compiled the analysis for a new corporate debt index. "Now it is about conserving capital and building a fortified balance sheet".

Companies tapped bond markets for US$384 billion between January and May, and Mr Meyer estimates that recent weeks have set a new record for debt issuance from riskier "high yield" companies with lower credit ratings.

Lending markets had slammed shut for all but the most trusted businesses in March, but have been opened up wide again by emergency corporate debt buying programmes from central banks like the United States Federal Reserve, European Central Bank and Bank of Japan.

Companies included in the new debt index already owe almost 40 per cent more than they did in 2014, and growth in debt has comfortably outstripped growth in profits.

Pre-tax profits for the same group of 900 companies have risen a collective 9.1 per cent to US$2.3 trillion. Gearing, a measure of debt relative to shareholder finance, hit a record 59 per cent last year, while the proportion of profit devoted to servicing interest payments also rose to a new high.

US companies owe almost half of the world's corporate debt at US$3.9 trillion, and have seen the fastest increase in the last five years of any major economy with the exception of Switzerland, where there has been a wave of major M&A deals.

Germany comes in at No. 2 at US$762 billion. It also has three of the world's most indebted firms, including the most indebted, Volkswagen, which with US$192 billion of debt is not far behind countries like South Africa or Hungary, though it is inflated by its car finance arm.

In contrast, a quarter of the companies in the new index have no debt at all, and some have vast cash reserves. The biggest of these reserves stands at US$104 billion and belongs to Google's owner, Alphabet.

Mr Meyer said credit markets still had some way to go to get back to pre-Covid conditions, and the ongoing threat of the virus remained investors' central concern. "It is all a recipe for a more challenged outlook than we thought two months ago," he said.

REUTERS