Is this the start of the JSE’s deleveraging?


A JSE analysis shows a decline in commitments and interest-bearing loans on the balance sheets of listed companies. As interest rates start to climb, could this be the start of further deleveraging by JSE companies?

The graph below shows how JSE firms have used record interest rates to increase borrowing, restructure their balance sheets, and build war coffers to transport them through the fog of uncertainty sparked by Covid.

Source: Share Magic and Moneyweb

The total debt of all JSE companies, excluding banks, rose 12% between 2019 and 2020, as companies scrambled to get their hands on cash from any source. Many have declared a dividend holiday to fatten their war treasures, although evidence suggests the distribution taps have opened again in 2021.

Source: Share Magic and Moneyweb

The chart above examines the JSE Top 40, excluding banks.

Clearly, the decision to take on more debt in 2020 was a worthwhile gamble, as the amount of interest paid fell by around 30%.

Part of this would have been the result of debt restructuring and loan repayment holidays negotiated with lenders, but most of it was due to lower interest payable on existing and new loans.

Many Top 40 companies have announced dividend holidays or simply cut dividend payouts, but as the chart below shows, as the post-Covid economic boom has allowed dividend payouts to pick up in 2021 we are still not back to 2019 levels. Dividend payouts were 15% lower in 2020 compared to 2019. When it became clear that economic catastrophe had been averted, companies increased dividend payouts. by 5.5% on average in 2021.

“Remember that banks were required to suspend payments in 2020. Other entities have also followed suit in an attempt to strengthen balance sheets in anticipation of tougher times,” said Adriaan Pask, chief investment officer. at PSG Wealth.

Source: Share Magic and Moneyweb

Terence Hove, market analyst at Exness Africa, notes that debt levels were already on the rise from 2017 to 2019 in anticipation of lower interest rates. “I remember that the cut in interest rates by the SA Reserve Bank (Sarb) in July 2018 surprised the market. Then, from late 2019 to 2020, we saw the onset of historically low interest rates leading to cheap money, which was a good time to restructure loans or make new deals, including deals. home loans.

The sudden influx of cheap money, coupled with retained dividends, has fattened corporate cash exchanges – just as one would expect in a time of crisis.

Hove says the drop in total interest-bearing loans on corporate books as we enter 2022 signals potential for balance sheet deleveraging as the interest rate cycle has now reversed. “During the last meeting of the Sarb, the governor Lesetja Kganyago was very belligerent about the possible increases at each meeting in 2022.”

Companies that have embarked on aggressive debt reduction programs include Aspen, Bid Corp, Bidvest, EOH, Famous Brands, Growthpoint Properties, Impala Platinum, Imperial, Invicta, Life Healthcare, Motus Holdings, Multichoice, Omnia, Pepkor, Redefine Properties, Remgro, Sasol, Shoprite, Tsogo Sun, Truworths, Vodacom and Woolworths.

Several real estate companies, facing a drop in occupancy rates as tenants completely shut down their offices or reduce demand for office space, have been among the most aggressive in reducing their borrowing.

Sasol reduced its debt by nearly R60 billion in the past fiscal year, mainly through the sale of assets, including Secunda’s air separation units, which were used in part to repay debt. denominated in US dollars. Its balance sheet shows that total fixed assets have fallen by a third in the past two years, with cash flow more than doubling to R31 billion.

Shoprite, Pepkor and Sibanye Stillwater have also cut their debt significantly over the past year to strengthen their balance sheets and protect them from economic shocks.

Companies like Afrimat have increased loans to make acquisitions and strengthen their presence in the mining space.

Companies like Coronation, Richemont, Dis-Chem, HCI, Naspers, Ninety One, OneLogix, Reunert, Steinhoff and Sygnia are also showing significant increases in liabilities. Some seem to be keeping their powder dry to take advantage of opportunities that present themselves, others are holding onto cash as a financial buffer, while some have taken advantage of the lowest interest rates of a decade.

Adrian Saville, investment specialist at Genera Capital, points to several possible themes over the past year, including the suspension of dividend payments by certain companies.

Another topic was the suspension of investment plans. Gross domestic fixed investment (GDFI) collapsed in 2020, so liquidity / capex remained on the balance sheet, adds Saville. Internationally, yield curves have flattened. Taking on longer-term debt hasn’t been this cheap in decades. There have also been a number of stories of corporate actions that have taken place over the past year to revise the balance sheets.


Comments are closed.