Debt Capacity: Why does IG-Rating assumes Leverage <2,4/2,8; Why not 5 or 6? In search for the real explanation behind this num.
Hi friends,
I wondered why every Rating agency says, that in order to fall into Investmentgrade Rating scale, a company may not have a leverage of >2,4/2,8. I know, that this is "the market standard". Another explanation says, that for Investment Grade Rating a company must be able to repay its debt in 5-7y from its discounted FCFs.
I know all these numbers; but I never found the answer for where these numbers come from.
Can anybody here explain this to me?
Thank u very very much!!
the ratings agencies (and the banks) employ a bunch of quants statistically analyzing the relationship between corporate default rates and credit structures. those models spit out some number representing 'critical leverage', if you will, and that's what you see in their classification guidelines.
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