Corporate Debt Needs to Be Managed More Carefully

The issue of corporate debt should not be treated lightly. For three reasons: the strategic role that debt can play in financing a company's return to growth and competitiveness; the complexity and selectivity of today's financial environment; the risk of making the debt structure unsustainable for the business. The management of corporate debt may therefore rise to the role of primary importance in the arsenal of corporate finance.

The changes that have affected the financial system have created a context where access to debt is characterized by greater complexity that can only be addressed by sophisticated analytical and management tools. Anyone who is in charge of managing debt today must do so with appropriate specialized skills. Just as in the past professional figures were born to deal with issues deemed relevant for corporate financial management, such as the roles of credit manager, treasury manager and risk manager, today conditions are ripe for the emergence of the role of debt manager. In addition to a solid knowledge of corporate finance, debt managers must possess advanced skills in terms of strategic planning of corporate indebtedness, balancing an aggregate view of the debt with the vertical activation of individual instruments of corporate borrowing. He/she must know the main mechanisms that govern the granting of banking credit and issuance of corporate bonds. The debt manager should also know and constantly revise the criteria used by different lenders decisions that affect the provision of debt capital. These criteria, in particular those defining the basic architecture of loan and bond ratings, must be incorporated in current business planning and corporate debt management models. In this body of practical knowledge, strategic debt models must be included. The imperative of modern finance is the search for the optimal level of debt. This objective remains valid, and can now be more easily implemented by companies due to the availability of data and processing tools.

The quest for optimal debt is embodied in the search for a balanced debt-to-equity ratio, one that minimizes total cost of capital and maintains ratings at least equal to the minimum investment grade class (BBB rating). The company management can stick to this classic approach in defining the company's financial structure, pursuing what economics identifies as the golden rule in debt management. However, other approaches, identifiable as styles, can justify borrowing decisions that deviate, even strongly, from the norm of optimal debt. Some of these borrowing styles can be classified. There are companies that do not make use of debt (so-called zero-leverage firms), enterprises that use debt mostly to cover current expenses (as most of the small and medium firms do) and those who resort to borrowing to finance fixed capital investment (such as firms geared to the creation of strong strategic assets), and finally the style of companies that borrow aggressively to support ambitious growth plans. Debt management must align with style chosen by the company and shared by top management. This means ensuring consistency between short and long-term business goals and mechanisms of financial leverage. This also means that debt management will be more hard-headed after that a certain lightness of mind permeated borrowing decisions in the recent past. More careful decisions on how much debt a company should have will be rewarded in terms of greater financial sustainability.