Tuesday, January 18

Is this the beginning of the deleveraging of the JSE?

An analysis by the JSE shows a fall in liabilities and loans that accrue interest on the balance sheets of listed companies. As interest rates start to climb higher, could this be the beginning of more sustained tax relief from JSE companies?

The graph below shows how JSE companies used historically low interest rates to increase lending, restructure balance sheets, and build war chests to overcome the fog of uncertainty brought on by Covid.

Source: Share Magic and Moneyweb

The total debt of all JSE companies, excluding banks, increased 12% between 2019 and 2020, at a time when companies were struggling to get cash from any source. Many declared dividend vacations to fatten up their war chests, although evidence suggests the distribution taps opened once again in 2021.

Source: Share Magic and Moneyweb

The chart above looks at the JSE Top 40, excluding banks.

It’s clear that the decision to take on more debt in 2020 was a worthwhile gamble, as the amount of interest paid dropped by roughly 30%.

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

Many of the top 40 companies announced dividend holidays or simply cut dividend payments, but as the graph below shows, while the post-Covid economic boom allowed for the resumption of dividend payments in the course of 2021, not yet. we are at the level. Dividend payments were 15% lower in 2020 compared to 2019. When it became clear that economic catastrophe had been averted, companies increased dividend payments by an average of 5.5% in 2021.

“Remember, banks were forced to delay payments during 2020. Other entities also did the same in an effort to strengthen balance sheets in anticipation of more difficult times,” says Adriaan Pask, chief investment officer at PSG Wealth.

Source: Share Magic and Moneyweb

Terence Hove, a market analyst at Exness Africa, notes that debt levels were already rising from 2017 to 2019 in anticipation of a drop in interest rates. “I remember that the SA Reserve Bank (Sarb) interest rate cut in July 2018 took the market by surprise. Then, from the end of 2019 to 2020, we saw the start of historically low interest rates that led to cheap money, which was a good time to restructure loans or enter into new contracts, including home loans. ”

The sudden arrival of cheap money, coupled with withheld dividends, fattened companies’ cash, exactly as might be expected in times of crisis.

Hove says the drop in total interest-bearing loans on the company’s books as we enter 2022 indicates possible balance sheet deleveraging as the interest rate cycle has turned. “At the last Sarb meeting, Governor Lesetja Kganyago was very tough on the possible hikes at every meeting in 2022.”

Companies that embarked on aggressive deleveraging 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, which faced lower occupancy due to tenants closing offices entirely or reducing demand for office space, were among the most aggressive in reducing loans.

Sasol reduced its debt by about R60 billion during the last financial year, mainly through the sale of assets, including the Secondary Air Separation Units, which was used in part to pay off debt denominated in US dollars. Its balance sheet shows that total fixed assets fell by a third over the past two financial years, with cash holdings more than doubled to R31bn.

Shoprite, Pepkor and Sibanye Stillwater also made heavy debt cuts over the past year to bolster balance sheets and protect them against economic hurdles.

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

Also showing considerable increases in liabilities are companies such as Coronation, Richemont, Dis-Chem, HCI, Naspers, Ninety One, OneLogix, Reunert, Steinhoff and Sygnia. Some seem to be keeping the powder dry to seize opportunities as they arise, others cling to cash as a financial buffer, while some took advantage of lower interest rates in the decade.

Adrian Saville, investment specialist at Genera Capital, points out several possible issues over the past year, including the suspension of dividend payments by some companies.

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


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