Guidelines for Choosing Corporate Debt

Today, when organisations are looking to borrow, corporate treasurers have their choice from among a wide range of debt structures. At any point in time certain debt products are more in fashion with lenders and borrowers than others, and some fashionable products may come with better terms and conditions than ones that are less in favour. While that makes the products of the moment worth looking at, you need to keep in mind that fashions come and go – and you might not want to be caught wearing bell-bottom jeans when everyone else has moved to drainpipe trousers. Depending on your organisation, a more ‘timeless’ solution may be best.

This is especially true since choosing the structure that is right for your organisation depends on far more than just financial considerations – culture, brand, timing and other factors can be more important factors than price in determining the best product for your organisation.

To help you decide which structures and products will work best for your organisation, a good start is answering the ten questions below. The first is perhaps the simplest, but too often overlooked question:

1. What does your organisation need the money for?

Is your objective to fund an acquisition? Do you need money for capital expenditure? Do you want to make a special dividend payment? If you’re looking to buy an asset with a long lifespan you’ll probably want to match the funding to that lifespan.

2. How much flexibility do you need?

Whatever structure you put in place it’s likely to be there for years. As your corporate agenda changes in the future, will the structure have the flexibility to match it? If your organisation is ‘cash poor’ today but ‘cash rich’ in several years, you may want to repay your lenders sooner than you’d originally planned – will the penalties involved be too great?

3. Do you really understand all the details of what your bankers are trying to sell you?

Fashion plays a part in what lenders offer, and sometimes the fashion is for incredibly complicated products. These may be exactly what you need – but you need to understand exactly why they are right for your organisation. Sometimes simpler structures are the best choice. Also, banks sometimes use complexity as a justification for higher fees. Be sure that you need all the frills that a particular structure offers before paying for it.

4. What’s worked for you in the past?

With your in-house experience and expertise, what’s worked for your organisation in the past? Keeping up with new trends is important because new ideas may indeed offer you something better. But change for change’s sake isn’t justifiable. Use your experience as a base case to judge any new structures that you’re considering.

5. What’s your in-house culture?

Different organisations have different attitudes to risk, reward and costs. It’s vital that you understand your chief financial officer’s and board members’ positions on these issues – while the decision may be yours, these colleagues are going to have to be comfortable with that decision.

6. What’s your organisation’s public borrowing ‘profile’?

Although many senior managers don’t recognise it, for many corporations borrowing is a relatively public undertaking – it’s certainly highly visible to lenders, analysts and shareholders. Different structures will put the organisation (and management) more or less in the spotlight and you need to make choices based on how comfortable you are with that attention.

7. How much management time will different structures require?

From a management point of view some structured products are fairly straightforward, while others require senior managers to spend time on road shows or other time-consuming processes. Can your organisation afford its senior managers to take that time, or do they need to be concentrating on other priorities?

8. Do you have a sensible methodology for making your decision?

As making a decision about any structured product involves much more than just price do you have a decision tree that tests against specific criteria? This can help you better understand the underlying risks and also let you see where potential benefits actually lie.

9. Do you need advisers – either internal or external?

With the growing complexity of different structures it can be sometimes be more efficient to ask for help with your decision. Many structures now have implications beyond finance. With many structured products including derivatives of some kind, International Financial Reporting Standards, and the transparency they seek to achieve, will come into play in many circumstances.

10. Will you be fired if it all goes wrong?

This may sound like a particularly pessimistic question, but considering the nature of many structured products it’s a legitimate one, and one that speaks to your personal appetite for risk. Complicated structured products can seem pretty whizzy and have lots of benefits for your organisation – but many times treasurers won’t be recognised for those benefits. If these complicated structures go wrong, however, the results can be messy – and treasurers are likely to get the blame for the mess.

If you can answer these questions you’ll have gone a long way to deciding between the different debt structures available today. The key point to remember, and something that each of these questions point to, is that there is much more that needs to go into your decision than just following current fashion.

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