The credit ratings agency Fitch has reported that the Adani Group is “deeply over leveraged”, and may, “in the worst-case scenario”, spiral into a debt trap and possibly a default.
When is a company ‘over leveraged’?
- A company or business is said to be “over leveraged” if it has unsustainably high debt against its operating cash flows and equity.
- Such a company would find it difficult to make interest and principal repayments to its creditors, and may struggle to meet its operating expenses as well.
- In the latter case, the company may be forced to borrow even more just to keep going, and thus enter a vicious cycle. This situation can ultimately lead to the company going bankrupt.
What happens when a company is over leveraged?
- Being over leveraged constraints companies’ growth plans. If payments are not paid in time, it may lose assets, which may be taken over by creditors, who may also launch legal proceedings to recover their money.
- The inability to repay existing debts puts limitations on future borrowing by the company. Also, an over leveraged company will find it extremely difficult to get in new sets of investors, all of which will add up to further diminish its financial present and future.
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