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 sets the priority ranking of creditor claims in the bankruptcy waterfall
- Cash is an 'unencumbered' asset that can be spent or misused before debt matures
- Net leverage is a metric reserved solely for investment-grade issuers
- Gross leverage is the figure used to compute the firm's periodic cash interest expense
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