Big corporations taking out massive loans, despite having sufficient funds on hand
San Miguel Corporation (SMC), a dominant conglomerate in the Philippines, has strategically opted to borrow money instead of saving up for projects. This approach is aimed at accelerating growth, seizing market opportunities promptly, and leveraging financial efficiency.
In the first quarter of 2025, SMC reported a net income of P43.4 billion. This substantial figure underscores the conglomerate's financial strength, making it possible for them to borrow large sums without worrying about the burden of debt.
One of SMC's recent borrowings was more than $23 million (about P1.3 billion) from its $2.165 billion loan facility for land development works of the New Manila International Airport in Bulacan.
Large corporations like SMC choose to borrow money for several strategic reasons:
- Capitalizing on low borrowing costs and market conditions: SMC issues bonds or taps debt markets when interest rates are favourable or when capital markets provide attractive financing options.
- Leveraging funds to maintain liquidity and flexibility: Retaining cash instead of tying it up in projects allows corporations to respond quickly to other investment opportunities or operational needs.
- Enhancing returns through financial leverage: Borrowing enables companies to invest in projects that can yield higher returns than the cost of debt, increasing overall profitability and shareholder value.
- Supporting large infrastructure or expansion projects quickly: Projects like infrastructure development (airports, power plants) require huge upfront capital, and borrowing spreads the financial burden over time while enabling timely completion.
- Tax advantages: Interest payments on debt are often tax-deductible, reducing the company’s effective tax burden, making debt more cost-effective than equity financing or internally saving for projects.
This strategic borrowing contrasts with simply saving up internally, which could delay critical investments and reduce competitive agility. SMC’s active bond programs, such as extending a P50 billion bond facility, illustrate their use of borrowed capital to fund diverse ventures spanning food, infrastructure, and energy.
However, equity fundraising chips away at the original shareholders' stake in the company. For a conglomerate like SMC, the money might be spread across multiple subsidiaries, each with their own plans, earmarks, and budgets. Issuing equity can be more expensive than taking on debt for a company.
Moreover, founders or family members may surrender their stake and power in the company when new shares are issued. Having more voices in stockholder meetings could mean more competing views on strategy, risk, and return timelines.
In conclusion, large corporations like SMC borrow to enable faster growth, optimize financial structure, maintain operational flexibility, and take advantage of favourable market conditions rather than waiting to self-finance major projects slowly. This approach allows them to seize opportunities, stay competitive, and drive growth in their various sectors of operation.
- San Miguel Corporation (SMC) has utilized borrowed capital to fund various ventures, including food, infrastructure, and energy, demonstrating their strategic approach to enhance growth and seize market opportunities promptly by leveraging financial efficiency.
- By opting to borrow money, SMC can capitalize on low borrowing costs and market conditions, enabling them to maintain liquidity and flexibility, enhance returns through financial leverage, support large infrastructure or expansion projects quickly, and enjoy tax advantages, making debt a cost-effective alternative to slow self-finance or issuing expensive equity.
