The great JSE deleveraging accelerates

The deleveraging of the JSE continued in 2022, with total interest-bearing loans owed by all JSE companies – excluding banks – falling below R1 trillion for the first time in five years.

Debt peaked in 2020 at the height of the Covid-19 pandemic, when interest rates fell to 3.5% and companies scrambled to shore up balance sheets hit by plummeting sales.

The process of derisking balance sheets, already much in evidence in 2021, continued in 2022.

A Moneyweb analysis shows companies were more inclined to take on debt in 2020 to see them through the Covid crisis, but then began restructuring balance sheets as economic conditions improved.

A relatively brisk market recovery in 2021 allowed debt to be paid down as it became clear interest rates at 3.5% wouldn’t last. Once the fear of extended Covid lockdowns dissipated, companies raced to reduce debt in anticipation of a spike in interest rates.

JSE Top 40

The rump of this debt is owed by the JSE Top 40 companies, where the deleveraging trend is most in evidence.

Over five years, the companies showing sharp debt reductions are Anglo Platinum, brewer Anheuser-Busch, Aspen Pharmaceuticals, BHP, MTN, Pepkor, Sasol, Steinhoff and Sun International.

Property investment companies went against this trend, taking on more debt – in some cases to take advantage of property opportunities that presented themselves following the Covid lockdown crash in 2020.

Mirroring the drop in interest rates since 2020, the interest paid on borrowings by JSE companies likewise dropped sharply over the last two years, though this will almost certainly increase substantially in 2023 to reflect the higher costs of borrowing.

The aggressive fight against inflation by the South African Reserve Bank (Sarb) is having the desired effect, says Terence Hove, market analyst at Exness Africa.

“Sarb’s fight to bring back inflation within the 3-6% inflation target range saw consecutive 75 basis point increases at most of the Monetary Policy Committee meetings in 2022. While this was a necessary move, the other effect of this will be the drastic decrease in borrowers taking on loanable cash as is seen by the downward shift in the interest-bearing debt.

“What is interesting is how interest paid is lower, as higher interest rates would traditionally attract higher deposits to chase higher interest payments on these deposits.

“This would then suggest that most corporates are now utilising their previously strong cash flow positions to fund their business activities versus taking on debt,” says Hove.

“Companies that strengthened their cash and liquidity positions during the ‘Covid years’ while also reducing their debt are weathering the high-priced debt years brought by the higher interest rates.”

Read: A2X marks the spot, grows securities by 67% in 2022

Dividends paid by all JSE companies in 2022 dropped nearly 6% over 2021, though shareholders were still better off than in 2019, prior to Covid.

The big dividend payers were commodity companies such as Anglo Platinum, Impala Platinum, BHP and Kumba, financial services companies FirstRand and Standard Bank, and telecoms groups MTN and Vodacom.

Many companies suspended dividend payments in 2020 to shore up balance sheets during the Covid-induced downturn.

Dividend payments resumed with a vengeance in 2021 and continued in 2022, albeit at a slightly lower rate.

* Listen to Ryk van Niekerk’s interview with Jean Pierre Verster of Protea Capital Management (in Afrikaans) or read the transcript in English: ‘Steinhoff is technically insolvent’

You can also listen to this podcast on iono.fm here.