Not all senior finance executives are paying down debt or putting plans for balance sheet restructuring on hold. Indeed, only around four in ten executives questioned for our survey say that they plan to cut back debt in response to the credit crisis. For those that do not plan to pay down debt, some are continuing with existing plans to invest capital or return cash to shareholders. In many cases, these are companies with solid balance sheets and strong cash flow generation.
Luxembourg-based satellite operator SES is one such company. When Mark Rigolle arrived as CFO in August 2004, he found a corporation deleveraging after having swallowed a big cash-and-stock acquisition three years previously. He also found a business with a very long operating cycle, including lead times of up to five years in capital expenditure and ten-year customer contracts. This meant that cash flows in and out of the company were little affected by short-term, or perhaps even mid-term, factors.
Bolstered by this long-term visibility in revenues, earnings and cash flows, the group decided to boost return on equity by taking on greater debt and handing more cash to shareholders via share buybacks and dividends. Mr Rigolle set a target debt level of 3.5 times EBITDA (versus around 2.2 times at the end of 2004). “At that level, we would still probably have one [credit rating] notch between us and [sub-]investment grade,” he says.
At the end of 2007, SES closed its books with net debt of €3.2bn, equivalent to just under three times EBITDA. SES has bought back around one third of its equity in the past three years, according to Mr Rigolle. In 2007 alone, the group ploughed €1.6bn into share repurchases and dividends. Return on equity soared to 17.7% in 2007, from 10.3% back in 2004, according to Bloomberg data. And over the same time-frame, the SES share price has more than doubled.
Despite SES’s strong financial position, Mr Rigolle remained more than aware that sentiment on the credit market could worsen. Keeping an investment-grade credit rating has been the company’s mantra when it comes to determining the right level of leverage. “We take a very conservative view that as long as we remain investment grade, come credit crunch or whatever, at least we will be less exposed to erratic market sentiment,” he says.
