medium · Debt Capital Markets credit-ratings-risk
Why might a credit analyst view a high gross leverage ratio as a risk even if net leverage is low due to a large cash balance?
- Gross leverage determines the priority of claims in a bankruptcy waterfall
- Cash is an 'unencumbered' asset that can be spent or misused before debt matures
- Net leverage is only used for investment-grade companies
- Gross leverage is used to determine the interest expense of the company
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