At a recent TMT conference I attended, a speaker from Moody’s characterized the target capital structure of investment-grade Telecom operators as a Net Debt-to-Ebitda ratio of between 2.0x and 3.0x.
To remain within the target interval, firms need to balance their investments and payout policies with cash available from operations. A ratio above 3.0x negatively affects lenders’ attitudes, making debt more restrictive and expensive. A ratio below 2.0x raises shareholders’ concerns that cash might be wasted in imprudent acquisitions and value-destroying projects.
As the figure below indicates, companies actively manage their finances in an effort to stay within the designated interval.
By meeting shareholders’ remuneration expectations and their obligations to creditors, firms are able to keep key providers of capital pacified. Additional efforts to achieve the absolute optimal capital structure only translate into unnecessary and costly adjustments. Thus, the fact that firms do not rebalance capital structures frenetically does not mean that firms are inattentive. Rather, the apparent passiveness reveals a lack of concern with some variation as long as the Net Debt-to-Ebitda ratio stays within the target range. But when the ratio approaches the critical limits, firms tend to become sensitive and act to correct deviations. Market conditions then determine whether these corrections happen quickly or slowly.
 Moody’s includes operating leases and pension liabilities in gross debt.