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Ever since the financial crisis in 2008 and 2009, there is an ongoing worldwide debate on the
question which government indebtedness is acceptable and which government indebtedness is
not acceptable and tolerable for the longer run. The keyword in this connection is the notion
of debt sustainability of a state meaning how much that state can bear and service over time,
without getting to the brink of insolvency.
We – as treasurers in our corporations – have a pretty clear view what the debt sustainability
of our corporation is. And we are not left alone asking ourselves when / what such debt
sustainability of our corporation is. If we have doubts about what it really is, then we will talk
to the banks which make loans to us. That will help us quickly to learn where our debt limits
are.
And if we do not believe what banks are saying and if we want to issue debt securities in the
capital market, then we will always be able to go to the rating agencies, and they also will
clearly tell us what our debt sustainability is, and by which margin it may vary to the upside
and downside. Further than that, the rating agencies will clearly tell us at which indebtedness
ratio our rating would be AAA, and at which indebtedness ratio our rating would be
subinvestment grade, meaning below BBB-.
And of course – as we all know – the acceptable debt ratio is not only this static number. It
has to be complemented by the EBITDA earnings to fixed financial charges ratio.
And the laws in our countries also tell us, when we have overextended the corporate debt and
have to declare insolvency. The two alternative reasons for insolvency, given in the law are:
-One, so called over-indebtedness, meaning a corporation has more debts than assets.
-and Two, illiquidity.
IGTA eJournal | Summer 2015 | 16