(FORTUNE Magazine) – A DREAD OF DEBT no longer inhibits the top managements of U.S. corporations, which through good times and bad have been taking on more and more of it. But despite the lurid worries of many financial observers, corporate America doesn't seem to be borrowing its way to disaster. In 1960, the total liabilities of FORTUNE 500 industrial companies -- mostly short- and long-term debt -- averaged 35% of assets; shareholders' equity made up the balance. At the end of last year the liabilities figure stood at nearly 55% (see chart on page 60). This shift toward greater leverage horrifies some leaders of the financial community, who are also uneasy about the debt many companies are piling on to thwart takeovers or to carry out leveraged buyouts. Much of the new debt, these critics note with dismay, takes the form of high- yield ''junk'' bonds. Felix Rohatyn, a partner at the New York investment banking house of Lazard Freres, envisions a toppling of dominoes if the economy falters and corporate cash flows taper off. ''Not only is this situation dangerous for the companies burdened with debt,'' he says, ''but also to the institutions holding it.'' Some chilling statistics suggest that the worriers have a point. According to the Federal Reserve Board, the debt of nonfinancial corporations rose $176 billion last year, to $1.3 trillion. Short-term debt, moreover, stood at a record 52% of total debt at the end of 1985's first quarter. On the face of it, this leaves companies more vulnerable than ever to a flare-up in interest rates. The rising indebtedness of companies not only seems risky in many ways, but even a bit perverse in the economic and political climate of the 1980s. A long-standing justification for leverage -- inflation -- is declining; borrowers can no longer look forward to repaying with fast-cheapening dollars. More serious, the cash flow from which most industrial companies repay may shrink if the Reagan Administration can enact its tax plan, which would kill the investment tax credit and stretch out depreciation write-offs. However, long before managements push leverage to the 100% level, courting Chapter 11 proceedings, concern about creditworthiness will compel them to halt. Meanwhile, the rise in debt is not as serious as it appears. Decades of inflation have left assets on corporate balance sheets grossly undervalued -- a fact well known to raiders. Hence, the shareholders' equity portion of capital is understated and the debt proportion exaggerated. Robert A. Taggart, a Boston University economist, says that when the market value of corporate assets is used in the comparison, corporate debt is a slightly smaller proportion of capital than in the early 1970s. Nor is the growth in short-term debt necessarily cause for alarm. Many chief financial officers, convinced that interest rates will continue down, are holding off refinancing that debt with medium- and long-term bonds. So long as interest rates are falling, moreover, companies can service debt more cheaply than they could several years ago. Interest payments as a percentage of cash flow have actually fallen since the beginning of the decade. Recent history provides the most telling argument for viewing the debt trend with comparative calm. The combination of events most feared by the Cassandras -- soaring interest and a recession -- occurred in 1981 and 1982. The prime rate on bank loans shot beyond 20% and business went through the worst slump since World War II. Bankruptcies rose, but most corporations stayed solvent by a wide margin. Another slump could be more serious. But defenders of the trend to increased indebtedness say most companies, particularly those in high-growth industries, | can safely live with it. Frederick Joseph, chief executive of Drexel Burnham Lambert, the leading underwriter of junk bonds, contends that any analysis of U.S. corporate debt has to be undertaken case by case. ''Overall statistics on debt,'' he says, ''are as useful as saying the planet on average is five feet underwater.'' SOPHISTICATED new financial techniques have lessened the hazards of carrying debt. Clayton & Dubilier, a leveraged buyout firm in New York, commonly employs a combination of tactics to guard companies it takes private against interest rate hikes. It may arrange a ''swap'' and transfer the company's short-term interest obligations to another company that is overburdened with long-term obligations. It may also encourage the company to invest in financial futures, which have become widely used only in the past five years. By going short on Treasury bond futures, for instance, a company can earn enough to offset some of its added debt costs if interest rates shoot up. Says Joseph Rice, Clayton & Dubilier's president: ''These instruments are available and a lot more people -- the smart ones -- are using them.'' Rice has been working out the details of a $1-billion leveraged buyout of Uniroyal Inc. by a group of investors. For some companies, increased leverage can be an unalloyed blessing. Stock buybacks by financially strong corporations in recent years, which often have had the effect of raising debt-to-equity ratios, have been a bonanza for shareholders who held on to their shares. A recent FORTUNE study (April 29) shows that over the decade through 1984, stockholders in companies that bought back shares enjoyed a far larger total return on their investments than stockholders in general. Kellogg Co., which had little long-term debt until last year, borrowed to buy in 20% of its shares. Since then the stock has zoomed 50% to a recent $59 a share, outpacing even the fast-rising group of food stocks. Other companies go deeper into debt because they see long-term payoffs. They're building new plants to serve expanding markets or making acquisitions that they hope will boost profits. Monsanto, a St. Louis chemical company, says it would be prepared to raise long-term debt from 18% of capital to 30% to make a major acquisition. Betting that new products will emerge from its genetic engineering division, the company has been in the market for a large pharmaceutical company to distribute them. PUSHED TOO FAR, leverage can of course be a curse. In speeches around the / country, Securities and Exchange Commission Chairman John S.R. Shad recites a partial roster of companies that borrowed with bravado and then went bankrupt -- Baldwin-United, Charter Co., Lionel, Saxon Industries, Wickes Cos. Saxon is now part of Alco Standard Corp. and Wickes recently emerged from Chapter 11 proceedings. The specter of financial ruin also hovers over Rust Belt companies that have borrowed to modernize, expand, or merely hold on to market share. Many have been savaged by imports and by plunging demand for basic materials. ''Some of the heavy users of debt are not the best users,'' says Donald W. Mitchell, a Cambridge, Massachusetts, management consultant. ''Corporations that should have been trimming their sails have been borrowing a lot of money.'' Wheeling- Pittsburgh Steel, one of the most heavily leveraged companies in its industry, is in bankruptcy proceedings, and LTV Corp.'s net worth has sunk while long- term debt has soared. Phelps Dodge, a copper producer, took on more and more debt in the 1970s and early 1980s to finance modernization and pollution abatement equipment. Since then, with copper prices sagging, it has had to sell off chunks of the business to keep going. Takeover battles have left a lot of companies mired in debt. Martin Marietta escaped the clutches of Bendix Corp., now part of Allied Corp., only by borrowing heavily to buy back its shares. Though the company has worked down its huge indebtedness by selling off big pieces of the business, interest costs ravaged earnings for several years. Merger mania in the oil industry has created huge and burdensome new obligations. Chevron Corp. is a long way from climbing out of the $12-billion debt hole it dug itself into during last year's purchase of Gulf Oil. Through restructurings financed by huge debt, Phillips Petroleum and Unocal Corp. have escaped the clutches of T. Boone Pickens. Debt-heavy oil companies live under a special kind of danger these days: interest payments will decimate their profits if oil prices plunge (see The U.S. Economy). The high debt burdens of merger mania extend beyond companies under attack. Merely to make their balance sheets and cash flows less enticing to laser-eyed takeover artists, some managements have made major acquisitions of dubious merit. Fearing a raid, Chesebrough-Pond's, a Connecticut-based personal- products company, bought Stauffer Chemical in February for $1.25 billion, or 19 times estimated 1985 earnings. Chesebrough's debt went from about 45% of & capital to 70%. Standard & Poor's, discerning few benefits from the merger, knocked the company's bond rating down from AA- to BBB. Overall, Standard & Poor's has downgraded the long-term debt ratings of 438 nonfinancial companies and has upgraded those of only 295 since the beginning of 1983. At first glance, companies involved in leveraged buyouts seem downright foolhardy. The buyouts are commonly accomplished with 10% to 20% equity and new debt consisting, more often than not, of junk bonds. BECAUSE most bought-out firms go private, it's difficult to judge their performance. But most companies seem to have coped successfully, and for good reason: buyout specialists and their lenders have generally screened them for their ability to pay down debt. The great majority of companies have done so faster than expected, specialists in the field say. Dr Pepper slashed debt by selling off assets. Executives of Kohlberg Kravis Roberts & Co., the most prominent buyout firm, point to the record of several companies it bought in 1980 and 1981 and later took public or sold to public companies: PT Components, a maker of engine parts; Norris Industries, which produces construction and industrial products; and Lily-Tulip, the paper cup maker. Even though interest rates were spectacularly high during the period, all three companies paid down their debt substantially. PT Components, which went public early this year in a stock offering, reduced its long-term debt from $134 million in late 1981 to $85 million three years later. A large debt load, contends Rice of Clayton & Dubilier, compels bought-out companies to operate more efficiently: they have to or they won't survive. Therefore, they control inventories and production costs rigorously, keep employment rolls lean, and hold down management perks. Says Rice, ''You don't go around building lavish headquarters as a monument to your chairman.'' Rice and others note that leveraged buyouts have resulted in extremely few bankruptcies. And they say that, unlike some corporate raiders who bid for companies with no intention of eventually operating them, buyout firms take a piece of the equity. Says Theodore Forstmann, a general partner at the buyout firm Forstmann Little & Co., ''We are owners and we think like owners.'' In a philosophical vein he adds: ''Every idea that's beneficial if used moderately and prudently is a menace if used imprudently.'' That's exactly what's happening, some alarmists say, with junk bonds. They < get the label because they are rated below ''investment grade,'' Baa3 or BBB-, respectively, at Moody's and Standard & Poor's. Increasingly, they're turning up in takeovers as well as leveraged buyouts. Ted Turner's $5.4-billion bid for CBS would be financed mostly with junk bonds. But because many takeover bids come to nought, far more junk bonds are brandished during the battles than are ever issued. Drexel Burnham estimates that only 12% of the junk bonds it issues wind up being used in takeovers. Drexel chief Joseph argues that most high-yield bonds, as his firm prefers to call them, serve as a valuable source of capital for companies that don't measure up at the bond-rating agencies -- new or small companies without a long track record and once distressed companies that are making a comeback. The nightmare of most top corporate executives is that their bonds might somehow fall to the lowly junk category. But an obsession with maintaining bond ratings, some financial experts say, unduly restrains many companies when taking on a somewhat larger debt load might be desirable and prudent. Robert H. Litzenberger, distinguished professor of finance at the Stanford Business School, is no advocate of heavy leverage. But he chides managers who ''talk only about keeping their bond rating up by keeping debt down. In many cases that may not be the optimum course.'' EVEN SOME top officials at the big rating agencies concede that certain financial managers may be unnecessarily timid about leverage. ''We worry about the weaker companies whose debt is moving up a notch,'' says Solomon B. Samson, senior vice president for industrial ratings at Standard & Poor's. ''But we know there's debt capacity out there, and some strong companies should be using more.''

How much is too much? As long as debt remains well short of 100% of capital, the question is unanswerable. How much a company borrows, however, may depend less on abstract yardsticks of prudence than on the age of its chief financial officer. Economist Henry Kaufman, vice chairman of the diversified financial firm Phibro-Salomon Inc. and a foe of high leverage, blames much of it on a new breed of wrinkle-free financial managers weaned on junk-bond financing, two-tier buyouts, and the like. Without doubt the younger crowd views debt far less harshly than its predecessors -- many of whom retain a lingering memory of Depression horrors. Take Donald R. Kronenberger, the 64-year-old vice president and treasurer of / Goodyear Tire & Rubber Co. Kronenberger recalls seeing soup lines stretching for blocks when he was growing up in Cleveland. He takes a dim view of debt and talks with genuine anxiety about Goodyear's flirtation with high leverage a decade or so ago. It was a time when the company was pumping capital into new, highly automated plants to compete with Michelin in the burgeoning radial-tire market. Goodyear's debt as a percentage of capital reached 49%. The figure has fallen back to the 30% to 35% range in recent years -- and Kronenberger sleeps a lot better. He's about to retire, and appears glad to be leaving before any newfangled notions take root at his company. He simply can't understand how financial managers live comfortably in the shadow of mountainous debt, and has a special aversion for leveraged buyouts. Says Kronenberger, ''They are an idea that was created in hell by the devil himself.'' Many of the new breed of financial chiefs would find such views quaint, but that doesn't necessarily mean they intend to lead their companies to perdition.

CHART: TEXT NOT AVAILABLE Wall Street Cassandras are appalled by corporate America's swing toward higher l verage. As the chart at left shows, liabilities -- mostly debt -- have climbed s eeply as a percentage of total corporate assets since the early 1960s. Critics o the trend also fret about the changing composition of the debt. More and more o it is short term, making some companies vulnerable to jumps in interest rates. s the chart at right demonstrates, interest expense has become a far greater bur en than in the past; these days it's equal to a fifth of the average corporation s cash flow.

CHART: TEXT NOT AVAILABLE The Debt Derby Debt is up in most sectors of industry on FORTUNE's 500 lists, but it's higher i some sectors than in others. Retailers are tops in liabilities because of a mul itude of long-term store leases. Computer companies rank last.

CHART: TEXT NOT AVAILABLE Letting Go -- and Holding Back Aside from International Harvester -- whose liabilities exceed assets -- America Motors was the most leveraged of the major industrial corporations at the end o 1984. The company borrowed heavily from its French partner, Renault, to introdu e a new compact car to the U.S. market. Control Data has a subsidiary, Commercia Credit, that tilts its liabilities upward. Ashland Oil has since improved its b lance sheet. The conservative companies on the list at right carry little or no ong-term debt.