Credit Suisse has clarified that its report highlighting that effective debt may be higher was only to aid valuation comparison with other companies in the sector.

JSW Steel said it had gone by the accounting norms and the report was off the mark by stating that the company had understated its debt by at least $119 billion.

Defending its report, Credit Suisse said it values steel companies on EV/EBITDA (enterprise value/ earnings before interest tax, depreciation and amortisation). Hence, a proper assessment of net debt was as important as estimating EBITDA. Further, making net debt comparable across companies was also critical.

On other issues relating to debt, it said the first was acceptances.

According to accounting norms, the treatment of acceptances on JSW books was proper. It is because these are trade payables but with a banker’s guarantee, it believes economically these are equivalent to short-term working capital financing.

On securitisation of receivables, it said while this by itself is a perfectly acceptable practice, when comparing net debt across companies, this should be adjusted for such metrics.

Referring to mark-to-market on unhedged foreign currency, it said liabilities can only be done once dollar-rupee changes and is by definition as of date.

JSW could not have valued the debt at any dollar to rupee rate other than the one prevailing on March 31, 2012. What Credit Suisse flagged was that when looking at valuation levels today, such unhedged liabilities would be higher in rupee terms owing to the decline in the currency.

Further, as there has been no change in these policies this year, the changes flagged were incremental, it said.

(This article was published on July 9, 2012)
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