The unbearable lightness of the Corporate Debt

11 September 2019
Why the time has come for the new role of debt manager and which are the styles they have to draw inspiration from

by Alberto Dell’Acqua
Director of the Executive Program DEBT MANAGEMENT SDA Bocconi School of Management

The topic of corporate debt management should not be treated lightly. For three reasons: the strategic role the debt can play in the financing of growth processes and in corporate competitiveness; the complexity and selectivity of today’s financial context; and the risk of making the company’s financial structure unbearable for the company itself. Managing the corporate debt can thus rise to the role of autonomous discipline with a primary role within the mare magnum of modern corporate finance. The changes that have involved the financial system outline a context within which accessibility to the debt is characterized by a higher degree of complexity, which can only be taken on using sophisticated analysis and management instruments. Anyone who is called upon to deal with this must do so through specialized and appropriate skills. Just as in the past when new professional figures were created, and dedicated themselves to topics considered relevant to corporate financial management, such as the credit manager, the treasury manager and the risk manager, today the conditions are such that the role of debt manager should emerge. In addition to having solid knowledge of corporate finance, the debt manager should have advance knowledge in strategic planning of the corporate debt choices, balancing an overall vision of aggregate debt with the specific and vertical activation of single instruments of corporate debt. They should also know the main mechanisms that govern lending and the issuance of debt instruments in the bond market. The debt manager must know and constantly review the criteria used by the company’s different financial providers in deciding the provision of debt capital. Such criteria, in particular those that define the basic architecture for bank and bond market ratings, must be incorporated into the current corporate debt planning and managerial models. Amid this stream of knowledge we must also include the strategic models of corporate debt. The categorical imperative of modern finance is represented by the mantra of the search for the optimal debt. This objective is always a valid one, and today it can be applied even more easily by companies thanks to an increased availability of data and processing tools.

The search for the optimal debt consists in defining a balanced relationship between debt and equity capital, so as to minimize the cost of the overall capital and to maintain a rating that is at least equal to the minimal class of the investment grade segment (categorized by the standard acronym BBB). Corporate management can abide by this classical approach to define the corporation’s financial structure, pursuing what economic studies identify as the greatest virtue in practicing corporate debt. Other approaches, identifiable as managerial styles, can justify indebtedness choices that move sharply away from the objective of an optimal debt level. Some of these styles can be categorized. We can in fact often observe the style of those companies that do not resort to debt (the so-called “zero leverage” firms), the style of those companies who use debt prominently to cover their needs of working capital (such as most of the small and medium-sized businesses) and those who use it to cover the financing needs of the investments in fixed assets (such as companies geared towards creating strong strategic corporate assets), and finally the style of the companies who get into debt aggressively to support ambitious projects of corporate growth. Debt management should be in line with the management style chosen by the company and must be wittingly shared by the top management. This need is outlined by the search for coherence that should always be guaranteed between short and long-term corporate objectives and the financial support mechanisms. All said, managing the corporate debt will become increasingly harder and will reduce that kind of lightness that can permeate the choices on corporate debt. A reduced lightness on the choice of debt but which will certainly be compensated by an increased sustainability of the company.

SDA Bocconi School of Management