A Capital Structure Strategy Designed for Winning: Part Two

# Capital Structure

Former HP treasurer and NeuGroup member Zac Nesper shares questions that unlock corporate treasury's full value to the enterprise. Today's focus: part two of his insights on capital structure strategy.

Zac Nesper

Editor's note: Zac Nesper's 20 years at HP included stints in FP&A and multiple treasury roles before he served as treasurer for five years. He led HP's treasury separation into two companies large enough for the Fortune 50, dealt with fallout from the pandemic, and helped defeat a hostile takeover attempt by Carl Icahn. His other articles on managing treasury through a strategic lens focus on FX risk management, working capital management and treasury talent. In part one, I wrote that decisions about capital structure are among the most consequential in corporate finance and arguably the most important decisions a treasurer ever makes. I noted that real-world decisions require integrating theory with executive priorities, board viewpoints, competitive dynamics, rating agency realities and capital market conditions that shift constantly. And I provided five questions and pro tips for establishing an analytical foundation that takes into account the cost of capital, ratings and liquidity. Here are five more strategic questions for CFOs, treasurers and boards determined to get capital structure right. Stakeholder Management & Governance

6. How do you engage the CEO and the board on capital structure, and have you cultivated their understanding before you need it? Pro tip: CEOs and boards are rarely agnostic about capital structure. They have instincts, sometimes brilliant, sometimes shaped by experiences that do not translate to your company's situation. A CEO who built a career at a cash-rich technology company may resist leverage. One who came from private equity may want more of it. Engage early and bring analysis, not opinions. Frame the trade-offs in terms the CEO and board value: earnings accretion, shareholder returns, competitive positioning, M&A flexibility, ratings headroom. If the leadership instinct is directionally wrong, the analysis should make that evident without making it personal. Board governance of capital structure is situation dependent. A stable company generating consistent free cash flow may need only an annual capital allocation review. But a company navigating a downturn, pursuing transformative M&A or facing activist pressure needs more frequent communication to give the board a deep understanding of the trade-offs between leverage, liquidity, ratings and shareholder returns. One treasurer I know meets proactively with new directors or board advisors for a deep dive on the nuts and bolts of how she approaches capital planning, the sizing of excess liquidity and where ratings headroom sits before any major capital structure decision is on the table. That helps treasury build and bank credibility for the day the treasurer actually needs board support. At HP, I was the finance lead for the board's Finance, Investments and Technology Committee. That role provided the platform to educate board members on capital structure dynamics, stress-test scenarios together and build alignment before high-stakes decisions. When the Xerox takeover emerged, the board was not starting from zero. They understood our leverage capacity, our ratings headroom, and the trade-offs of committing $8 billion in capital returns in year one. Build your board’s understanding incrementally through regular updates. The board that understands the capital structure is the board that can move decisively and correctly when it matters. 7. Do you know who has the ear of the CEO and the board, and are you engaging with that ecosystem? Pro tip: All CEOs and boards have advisory ecosystems: investment bankers, legal counsel, compensation consultants, former executives, board members with financial backgrounds. These advisors shape views on leverage, capital returns, M&A appetite and risk tolerance. A treasurer who operates in isolation from this ecosystem will find that capital structure decisions get made around them, not with them. Build relationships with the company's lead investment bank, outside counsel and any board members with capital markets backgrounds. Understand which banks have influence with these decision-makers and connect with them. Make sure your analysis is at least as rigorous as what the outside advisors are providing, ideally more so, because you have the informational advantage of understanding the company from the inside. Engage with the advisory ecosystem proactively, not reactively. You are a partner, not a bystander.

Market Dynamics, Execution & Strategic Positioning

8. Is your debt maturity profile aligned with your business cycle, and are you managing refinancing risk proactively? Pro tip: Academic research (Barclay and Smith, 1995; Guedes and Opler, 1996) and market practice point to the same conclusion: maturity management is a first-order capital structure decision, not an afterthought. A debt maturity wall creates refinancing risk that compounds in a downturn when credit markets may be closed or prohibitively expensive. Ladder your maturities to avoid concentration. Refinance your revolver with plenty of runway: This is one of your most important de-risking tools. Target no more than 15% to 20% of total debt maturing in any single year. Plan by modeling “what if” scenarios on upcoming maturities and begin thinking about refinancing 12 to 18 months before maturity to avoid being forced into the market at the wrong time. 9. Does your capital allocation framework integrate organic investment, M&A, dividends and buybacks into a unified decision model, and how much should flow to share repurchase? Pro tip: Too many companies treat capital allocation in silos. Business units request capex, corporate development pursues M&A, and treasury manages buybacks and dividends while borrowing to fund the plan. The result is often an uncoordinated set of claims on cash that may not reflect optimal risk-adjusted returns. The right model forces every dollar to compete for capital on a risk-adjusted basis, with explicit trade-offs visible to the CFO and board. The practical challenge is governance. Within that unified model, sizing share repurchase is critical. Free cash flow provides a useful starting point. Then position it against your target leverage: How much can you return and still stay within your capital structure guardrails? From there, valuation matters. Be humble. Research consistently shows companies overestimate their ability to time repurchases. Assess competitive norms: What do peers spend on dividends versus buybacks, and does your mix signal confidence or distress? Preserve M&A firepower in a market where inorganic transactions are a requirement to compete. A company that exhausts balance sheet capacity on buybacks and then overpays for a leveraged acquisition is compounding errors. Understand the interconnectedness of buybacks with other investment decisions and consciously develop a plan that is as close as possible to the Pareto frontier for value creation. 10. Are you actively shaping how the capital markets price your company compared to peers and relative to your true potential? Or are you accepting the market's verdict? Pro tip: Capital structure benchmarking against peers is a standard exercise, but most companies stop at superficial leverage comparisons without asking why the differences exist. Are you more levered than peers because you generate more stable cash flows and can support it, or because you have been slow to delever after an acquisition? Are you less levered because your business is more cyclical, or because you have not done the analytical work to determine optimal leverage? When HP became two companies, we benchmarked both against their respective peer sets: HP Inc. against hardware technology peers and HPE against enterprise IT peers. We designed capital structures appropriate to each business's cash flow profile, cyclicality and strategic needs. Investors and analysts will benchmark you whether you like it or not. Make sure you have made the comparison first and can explain every material deviation. Deliberate differentiation from peers is a strategic choice. Accidental deviation is a vulnerability. Under an active approach, credit spreads are not a fait accompli. Management actions can materially influence them. The tools include: transparent communication with fixed-income investors, a constituency many companies neglect; proactive liability management (tenders, calls, exchanges); consistent execution against stated financial policy; and maintaining secondary market liquidity in your bonds. Engage your debt investor base the way you engage your equity investors. Fixed-income investors control your cost of debt. A 50-basis-point reduction in your weighted average cost of debt on a $10 billion debt stack is $50 million in annual pre-tax interest savings. That is worth managing.

Drive the Outcome This directive is the throughline of every point made above. After you have done the WACC analysis, built the rating agency relationships, stress-tested for downturns, modeled asset-liability sensitivities, funded growth and mapped the advisory ecosystem, what do you do with it? The answer separates great treasurers from good ones. You engage the C-suite proactively. You understand the CEO's strategic priorities and shape how capital structure supports them. You understand the CFO's risk appetite and quantify the boundaries. You understand the board's expectations and frame the narrative. You are a partner, you are the subject matter expert and this is core to your job. Too many treasurers do excellent analytical work and then wait to be asked or communicate in academic language that doesn’t resonate with the audience. The research sits in a drawer or in the presentation appendix. The stress tests gather dust. The rating agency relationships are transactional rather than strategic. The best treasurers translate that analytical work into practical actions and bring recommendations to the right stakeholders at the appropriate time. They shape the company's financial strategy rather than executing someone else's. Do the research. Own the expertise. Drive the outcome.

A Capital Structure Strategy Designed for Winning: Part Two

Former HP treasurer and NeuGroup member Zac Nesper shares questions that unlock corporate treasury's full value to the enterprise. Today's focus: part two of his insights on capital structure strategy.

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