Corporate Financial Health: The Role of Debt Management Strategies

Current Debt Levels of Major Corporations

ExxonMobil's debt to total capital ratio decreased to 13.5% in Q2 2024 from 16.4% at year-end 2023. Johnson & Johnson's net debt position improved to $16.0 billion. Apple reported total debt of $101 billion after repaying $4.3 billion. Verizon's total debt stood at $150.7 billion, and Amazon's debt inflows included $4.4 billion in short-term and $525 million in long-term debt for Q2 2024.

"The Corporation's debt to total capital ratio was 13.5 percent at the end of the second quarter of 2024 compared to 16.4 percent at year-end 2023." --- (XOM, sec filing, 2024/Q2)

"As of June 30, 2024, the Company had cash, cash equivalents and marketable securities of approximately $25.5 billion and had approximately $41.5 billion of notes payable and long-term debt for a net debt position of $16.0 billion as compared to the prior year fiscal second quarter net debt position of $17.1 billion (which included cash of $1.2 billion and debt of $8.4 billion related to Kenvue)." --- (JNJ, sec filing, 2024/Q2)

"We repaid $4.3 billion in maturing debt and increased commercial paper by $1 billion, leaving us with total debt of $101 billion." --- (AAPL, earning call, 2024/Q3)

"At December 31, 2023, our total debt of $150.7 billion included unsecured debt of $128.5 billion and secured debt of $22.2 billion." --- (VZ, sec filing, 2024/Q1)

"Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of $4.4 billion and $525 million for Q2 2023 and Q2 2024, and $17.2 billion and $863 million for the six months ended June 30, 2023 and 2024." --- (AMZN, sec filing, 2024/Q2)

Historical Trends in Corporate Debt Management

IBM, AT&T, Coca-Cola, Boeing, and GE have all demonstrated varied debt management strategies over time. IBM maintained a stable debt balance, AT&T reduced net debt through higher EBITDA and free cash flow, Coca-Cola issued long-term debt, Boeing balanced new debt issuance with free cash flow, and GE significantly reduced debt by over $100 billion since 2018.

"Our debt balance at the end of the second-quarter was flat with year-end 2023 at $56.5 billion, including $11.1 billion from our financing business. Putting this all together, our business fundamentals remain solid with continued revenue growth, margin expansion, cash generation, and a strong balance sheet with financial flexibility to support our business. Turning to the segments." --- (IBM, earning call, 2024/Q2)

"In addition to our ongoing network investment, we continue to reduce our net debt and leverage due to a combination of higher EBITDA and growing free cash flow. We expect these trends to continue and remain on pace to meet our target of net-debt-to-adjusted EBITDA in the 2.5 times range in the first half of next year." --- (AT&T, earning call, 2024/Q2)

"the quarter, we raised approximately $4 billion in cash by issuing long-term debt for general corporate purposes." --- (Coca-Cola, earning call, 2024/Q2)

"Turning to the next page, I'll cover cash and cash and debt. On cash and marketable securities, we ended the quarter at $12.6 billion, reflecting the $10 billion issuance of new debt in May, partially offset by the use of free cash flow in the quarter." --- (Boeing, earning call, 2024/Q2)

"Thanks to the GE team. We significantly improved our financial position, reducing debt by more than $100 billion since 2018 and enhanced our operational execution by embracing lean with a relentless focus on safety, quality, delivery and cost, in that order, to better serve our customers." --- (GE, earning call, 2024/Q1)

Impact of Interest Rates on Corporate Debt

Higher interest rates have led to reduced loan demand (USB), increased deposit costs (WFC), and necessitated strategic adjustments by corporates (BAC). Additionally, rising rates impact investment decisions (JPM) and cause fluctuations in debt instrument market values (MS).

"Turning to Slide 9, total average loans were $371 billion, down 0.5% linked-quarter as growth was impacted by slow industry loan demand in the current higher interest rate environment." --- (USB, earning call, 2024/Q1)

"with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter.If the Fed were to start cutting rates later this year, we expect that deposit pricing will begin to decline with the most immediate impact from new promotional rates in our consumer business and standard pricing for commercial deposits where pricing moved faster as rates increased, and we would expect betas to also be higher as rates decline.On Slide 5, we highlight loans and deposits." --- (WFC, earning call, 2024/Q2)

"As soon as interest rates start going up, that is pretty much gone. So now they are investing, they are very good, they are doing a very good job for their customers, how we are doing it too.Also within there are areas of growth in the Pavement business that we are focusing on corporates, particularly outside the United States, certain verticals that require specialization in the services that we provide like health care services, multiparty commerce and a small business." --- (JPM, Investor Day, 2024/05/20)

"So we have corporates that are as rates have stayed up higher, they've actually continued to fine tune their movement because the earnings credit rate, which the rate we give people for deposit balance in which they pay for services, stays up a little higher, so they can lower the balances on that side and put it more in sort of at the market pricing side." --- (BAC, conference, 2024/05/30)

"The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer." --- (MS, press release, 2024/04/22)

Role of Credit Ratings in Debt Management

Credit ratings play a crucial role in debt management by assessing the credit quality and default likelihood of debt issues, guiding companies like FIS to maintain investment-grade ratings while managing debt and capital allocation. Agencies like SPGI and MCO provide extensive ratings and assessments, influencing corporate debt strategies globally.

"Our credit ratings can also relate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issue may default." --- (SPGI, sec filing, 2024/Q2)

"We used a portion of the proceeds from the sale to retire debt and repurchase shares, and we plan to continue to use the remaining proceeds to return additional capital to shareholders through our existing share repurchase authorization, as well as for general corporate purposes, including acquisitions, while maintaining an investment grade credit rating." --- (FIS, sec filing, 2024/Q2)

"MIS publishes credit ratings and provides assessment services on a wide range of debt obligations, programs and facilities, and the entities that issue such obligations in markets worldwide, including various corporate, financial institution and governmental obligations, and structured finance securities." --- (MCO, sec filing, 2024/Q2)

"We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities." --- (SPGI, press release, 2024/06/27)

"We used a portion of the proceeds from the sale to retire debt and repurchase shares, and we plan to use the remaining proceeds to return additional capital to shareholders through our existing share repurchase authorization, as well as for general corporate purposes, including acquisitions, while maintaining an investment grade credit rating." --- (FIS, sec filing, 2024/Q1)

General Strategies for Managing Corporate Debt

Companies manage corporate debt through various strategies, including evaluating investment costs and credit quality (MSFT), avoiding reliance on short-term debt (GOOG), aiming for net cash-neutral status via share repurchases (AAPL), maintaining a mix of fixed and variable rate debt (VZ), and investing excess cash in secure financial instruments (AMZN).

"If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost." --- (MSFT, sec filing, 2024/Q3)

"Net proceeds from this program are used for general corporate purposes. As of June 30, 2024, we had no commercial paper outstanding." --- (GOOG, sec filing, 2024/Q2)

"Given the continued confidence we have in our business now and into the future, our Board has authorized today an additional $110 billion for share repurchases, as we maintain our goal of getting to net cash-neutral over time." --- (AAPL, earning call, 2024/Q2)

"Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions." --- (VZ, sec filing, 2024/Q2)

"We generally invest our excess cash in AAA-rated money market funds and investment grade short- to intermediate-term marketable debt securities." --- (AMZN, sec filing, 2024/Q2)

Sector-Specific Debt Management Practices

PepsiCo leverages diverse debt financing methods to meet its financial needs, while Netflix prioritizes liquidity and a healthy balance sheet. Disney relies on its strong financial condition and access to capital markets, Nike maintains high debt ratings, and Pfizer focuses on de-levering before share repurchases.

"Our Liquidity and Capital Resources We believe that our cash generating capability and financial condition, together with our revolving credit facilities, working capital lines and other available methods of debt financing, such as commercial paper borrowings and long-term debt financing, will be adequate to meet our operating, investing and financing needs, including with respect to our net capital spending plans." --- (PEP, sec filing, 2024/Q2)

"And that's really what it is. We're still going to have the same financial policies and principles in terms of prioritizing profitable growth by reinvesting in our core business, maintaining a healthy balance sheet with ample liquidity and returning excess cash beyond several billion dollars on the balance sheet of minimum cash and anything that we use for selective M&A to return to shareholders through share repurchase." --- (NFLX, earning call, 2024/Q1)

"We believe that the Company’s financial condition is strong and that its cash balances, other liquid assets, operating cash flows, access to debt and equity capital markets and borrowing capacity under current bank facilities, taken together, provide adequate resources to fund ongoing operating requirements, contractual obligations, upcoming debt maturities as well as future capital expenditures related to the expansion of existing businesses and development of new projects." --- (DIS, sec filing, 2024/Q3)

"We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively." --- (NKE, sec filing, 2024/Q4)

"Our strategy consists of maintaining and growing our dividend over time, reinvesting in our business at an appropriate level of financial return and making value enhancing share repurchases after de-levering our balance sheet." --- (PFE, earning call, 2024/Q1)

Future Outlook on Debt Management Strategies

Companies like Google and ExxonMobil are confident in their future debt management strategies, leveraging strong liquidity and balance sheet capacity to fund operations, investments, and potential M&A activities, ensuring financial stability and flexibility.

"Liquidity and Material Cash Requirements We expect existing cash, cash equivalents, short-term marketable securities, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future. Capital Expenditures and Leases" --- (GOOG, sec filing, 2024/Q1)

"I thought it would be a good opportunity if you could remind us how you think about utilizing that balance sheet capacity moving forward given you are still operating from a position of strength, whether it be deploying for future M&A, increasing buybacks or other opportunities. Thanks." --- (XOM, earning call, 2024/Q1)