InvestorQ : Is the rush for low debt due to many bankruptcies or due to falling yields?
diksha shah made post

Is the rush for low debt due to many bankruptcies or due to falling yields?

swati Bakhda answered.
3 years ago

Actually, it is a mix of both. In the last few years, corporates did see a lot of vulnerable companies literally go bust under the weight of too much debt. There is also a story of yields being low as it hints at companies being able to raise capital at low cost when needed.

Among the groups that went bust under the weight of too much debt, there is the ADAG group which destroyed immense value. There were cases like Jet Airways and Vodafone Idea that ran unsustainable business models with too much debt for just too long.

Then we had financial bubbles like IL&FS and Dewan Housing Finance which sort of toppled overnight. Excess debt was the drag on financial viability in all these cases. COVID only served to highlight this risk as companies saw a virtual drying up of revenues. That has led to the markets assigning a premium to low debt companies.

Let us now look at the aspect of low yields that you rightly raised. Formerly, the worry was that if companies repaid their debt, they may not get fresh debt at the same price. That is no longer the concern. RBI has clarified that rates will remain low in the foreseeable future of at least another year. So, what does that mean?

That means; debt reduction is not only acceptable but also desirable. Low debt companies find it easier to attract lenders as well as interested equity investors. In a world flush with liquidity, a good performer with low debt commands a premium. That is what companies are betting on as they accelerate their move to become low debt or debt free.