Big corporations take out massive loans, despite financial surplus
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In a strategic move, San Miguel Corporation (SMC), a dominant player in the Philippines, recently borrowed over $23 million (approximately P1.3 billion) to continue land development works for its New Manila International Airport in Bulacan [1]. This decision to opt for debt financing is part of a larger trend among corporations to leverage the benefits that debt offers, such as accelerated growth, preserved ownership, and cost efficiency.
Large projects, like the P740 billion Bulacan airport complex and NAIA modernization, require substantial upfront capital, often exceeding what a company can accumulate through retained earnings or equity issuance alone. Debt enables SMC to raise large sums quickly, for instance, through bond programs like its extended P50 billion bond shelf registration [1].
By choosing debt financing, SMC avoids diluting existing shareholders' ownership and control, a concern for family-led or closely held conglomerates. Moreover, interest payments on debt can be tax-deductible, effectively reducing the cost of borrowing versus equity, where dividends are not deductible [2]. This cost efficiency makes debt financing more attractive, especially when the company expects stable cash flows to service the debt.
Debt financing may also impose discipline in terms of scheduled interest and principal payments, pushing management to maintain operational efficiency. Additionally, debt instruments like bonds provide flexibility on maturities and covenants that help optimize capital structure [1][3].
While internal funds and equity might be more limited and slow to accumulate, debt allows the company to tap into capital markets and investors ready to finance growth, facilitating private sector-led economic expansion and infrastructure development [4].
In Q1 2025, SMC reported a net income of P43.4 billion [1]. Despite the borrowing, this move is not necessarily a sign of weakness for corporations like SMC. For a business, loans are not necessarily a burden or a last resort. Instead, they can be an efficient way to obtain funding for expansion.
This article is part of Finterest's series that demystifies the world of money and provides practical advice on personal finance. Finterest, a digital bank, also discusses the safety of digital banks and how to best use them in this context.
[1] Rappler. (2022, August 26). SMC borrows P1.3 billion for Bulacan airport project. Retrieved from https://www.rappler.com/business/794237-smc-borrows-1-3-billion-for-bulacan-airport-project [2] Investopedia. (n.d.). Dividends vs. Interest: What's the Difference? Retrieved from https://www.investopedia.com/terms/d/dividendsvsinterest.asp [3] San Miguel Corporation. (n.d.). Bond Issuance Programme. Retrieved from https://www.sanmiguel.com/investor-relations/bond-issuance-programme [4] BusinessWorld. (2022, August 26). SMC borrows $23 million for Bulacan airport project. Retrieved from https://www.bworldonline.com/smc-borrows-23-million-for-bulacan-airport-project/
In the context of the article, San Miguel Corporation (SMC) has borrowed funds for the development of its New Manila International Airport, a large project requiring substantial capital, predominantly because debt financing allows for accelerated growth, preserved ownership, and cost efficiency, as opposed to relying on internal funds or equity issuance alone. Additionally, debt financing provides a flexible and efficient means for companies like SMC to tap into capital markets and investors ready to finance growth, playing a significant role in private sector-led economic expansion and infrastructure development.
