Healthy or Risky

Germany’s biggest companies upped their debt to €638 billion

Symbolbild Finanzkrise, kleine Manager-Figur auf Aktienkurs, symbolic picture finance crises, share price with manager figure
The debt looks OK from here. Source: picture alliance

The non-bank and insurance companies listed on Germany’s DAX index have amassed €638 billion in collective debt, a 75 percent increase compared to 2007, a year before the financial crisis. The figure takes the companies’ cash into account.

The uptick in debt is thanks to extremely low interest rates for bank loans and bonds, which have made debt financing more attractive than before. The debt is good news for corporate growth ambitions, but worrying as economies threaten to cool.

At least 10 DAX companies, including BMW, Siemens and Merck, have accumulated more debt than they earned in 2017, even before expenses are subtracted. For example, German health care group Fresenius, which recently made several acquisitions, has around €17.4 billion in debt. That was offset by a paltry €6.3 billion profit (EBITDA) in 2017. That’s a debt ratio of 2.8.

Still, Germany is dwarfed by the total €164 trillion in liabilities around the globe, or more than double annual global output. Investors in Europe see failures in 6.8 percent of companies, a figure that climbs to 8 percent in the less risk-averse US.

The debt situation still seems manageable.

The type of risk these companies could one day face if interest rates inch higher is not hard to imagine, especially companies whose growth comes from credit-financed acquisitions. In such an instance the company’s balance sheet may have grown, but not thanks to new assets like patents or machinery, but rather with costly business activities. Bayer is an example of such a company as it works to take over the US agrochemical company Monsanto.

Yet compared to Chinese and American companies, the debt situation still seems manageable. German DAX companies are seeing high cash flows, record profits, are distributing low dividends and are eschewing buybacks. And bankruptcy isn’t on the horizon for any of the DAX companies either, should interest rates start rising.

However, German business leaders shouldn’t be complacent. A flashback to when the real-estate bubble burst shows how quickly risks can metastasize. Back then, during the real-estate crisis of 2007 and the global financial crisis shortly thereafter, both crises seemed to occur independently of the nation’s real economy. In 2007, just like in 2017, companies were making record profits.

Amid recent trade spats between Berlin and Washington, the same scenario is very likely to happen now as then. Germany could suffer aftershocks as soon as companies in the US face rising interest rates. Orders quickly slow to a trickle, regardles if they’re for Siemens powerplant parts, SAP software, Infineon computer chips or even chemicals from BASF. And if that trickle were to ever stop, German companies with a new mountain of debt could be in big trouble.

Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author: sommer@handelsblatt.com

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