Page 117 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

levels in 2009, and 71 percent planned to do so in 2010. This
seems wise, given that new debt is difficult to obtain and has
become more expensive owing to heightened default risks driv-
ing interest rates higher; 66 percent of our survey respondents
reported that financing was more expensive in 2009 than in
2008, and 68 percent said that it was less available.
Paying down debt may be easier said than done. Thus, taking
multiple steps to protect financial fundamentals can help.
In the early 1970s, McDonald’s took advantage of the low
cost of borrowing to expand its long-term debt from $43.5 mil-
lion in 1968 to $353 million in 1974 in order to finance a rapid
expansion. Yet when bond yields began to increase in the latter
half of the 1970s, McDonald’s used its strong cash position to
pay down that debt rather than issuing dividends. By the time
the prime rate reached 20 percent in 1979, McDonald’s had
returned to a relatively normal debt-to-asset ratio without hav-
ing to sell assets or raise more equity.

■ PROTECT BUSINESS FUNDAMENTALS ■
Shin-Etsu Chemical is well known in Japan for preparing for
downturns while the economy is enjoying an upturn, and vice
versa. Of course, given the helter-skelter performance of the
Japanese economy over the last 20 years, such preparation is
perhaps not surprising. Nevertheless, in 1990, while the
Japanese economy was enjoying prolonged strong performance,
the new CEO of Shin-Etsu, Chihiro Kanagawa, launched a
review of the business that resulted in cost cuts and a major
divestment of noncore businesses in order to improve the
strategic focus and efficiency of the company. While the fash-

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