Capital structure: CFOs and other finance officers say that one size doesn't fit all, but that capital structure sends key signals to the capital markets, lenders and other important financing sources.

Author:Sweeney, Paul
Position:Credibility And Flexibility Rule

Larry Seay sometimes wishes that he could undo the past. The chief financial officer at Meritage Corp., a Phoenix-based homebuilder, Seay notes that two years ago, the company took on $165 million in long-term debt financing at a rate of almost 10 percent. Yet, even as interest rates have plunged by several hundred basis points since then, the company is locked in by a "non-call" provision that prevents it from taking advantage of lower-cost money for five years, or until 2006.

In addition, the company is in a different position today. Its revenues have more than quadrupled since 1998--to $1.1 billion in 2002, from just $255 million then--making it much more creditworthy. "If we did this issuance today, we'd have stronger credit ratings and we'd get better rates," Seay says, adding: "If we could refinance it, we would."

Seay's hard-won experience in the world of finance has taught him several important lessons. One is that "the theoretical models you study in finance classes always talk about developing the lowest cost of capital, but you're often more dependent on the industry and the risk profile of your company."

It is a view echoed in different ways in a series of wide-ranging interviews with chief financial officers, corporate treasurers, financiers, consultants and experts asked to discuss the role of capital structure in a company's operations and whether it is possible to construct an ideal configuration. No one doubts that capital structure is central to the fiscal health of a commercial enterprise. As Frank J. Borelli, former CFO at Marsh & McLennan Cos., remarks: "The shape of the financial structure of the company says a lot about the company's stability."

But a common refrain was that "one size does not fit all." While B.J. Rone, a Dallas partner with the troubleshooting firm of Tatum CFO Partners, says "there are hypothetical answers at 50,000 feet" that debt should be 50 percent of equity, say, or that debt is preferable to equity because it is tax-deductible, companies and industries each have their particular set of capital needs, while lenders and financiers have another set of demands--and the playing field is constantly shifting.

"It's very difficult to have an ideal structure in today's world; there's so much volatility," says Dave Chavenson, treasurer at Flowserve Corp. in Dallas. Craig Monaghan, the CFO at AutoNation, the country's largest seller of new and used cars, adds: "In real life, you find many variables. What do capital markets look like today? How much cash can the company generate in the future? What are your demands for capital going forward?"

Adds Robert Tormey, a Tatum partner now on assignment at a Silicon Valley company in Sunnyvale, Calif...

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