medium · Debt Capital Markets credit-ratings-risk
A DCM associate is building a comparable table for a B2/B-rated LBO. Peer A has Net Leverage of 5.5x and Interest Coverage of 2.2x. Peer B has Net Leverage of 5.5x and Interest Coverage of 1.5x.
Which peer is fundamentally riskier, and what is the most likely structural reason?
- Peer B is riskier because its higher blended cost of debt provides less cushion for earnings volatility.
- Peer A is riskier because it most likely carries a larger slug of non-cash payment-in-kind notes.
- Peer B is actually less risky, since a bigger cash balance offsets its gross debt and lowers net leverage.
- There is no genuine difference in credit risk between them, since both names report identical leverage multiples.
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