Warren Buffett may be right on ills of leverage; top Indian, global companies that folded under debt pile

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Updated: Mar 05, 2018 4:11 PM

Billionaire investor Warren Buffett has time and again reiterated that excess leverage is a sure shot way of going bust. We take a look at global and Indian companies which couldn't handle their own debt pile.

Warren Buffett says that while his aversion to leverage has dampened Berkshire’s returns over the last many years, it has allowed him to sleep well. (Image: Reuters)

Billionaire investor Warren Buffett has time and again reiterated that excess leverage is a sure shot way of going bust. In a recent interview to CNBC, Warren Buffett quotes his partner and friend Charlie Munger saying that there is only three ways a smart person can go broke: liquor, ladies and leverage, adding that Munger added the first two only because they started with L. “It’s leverage,” Warren Buffett told the channel. In recent times, many well known Indian and global companies have undergone massive financial stress and filed for bankruptcy, as they crumbled under their own debt pile. We take a look a look at five such companies.

Lehman Brothers

Considered as one of the the biggest bankruptcies of all-time, US based Lehman Brothers had filed for bankruptcy in 2008, amid the global financial crisis. A victim of subprime mortgages, with $639 billion in assets and $619 billion in debt, Lehman’s bankruptcy came as a rude shock as it was the fourth largest investment bank at the time of its collapse.

Kingfisher

With a debt amounting to more than Rs 7,000 crore from a consortium of 17 banks, Vijay Mallya-run Kingfisher Airlines had to shut operations in 2012. Notably, 13 out of the 17 banks were public sector banks with including the largest lender SBI, IDBI Bank and Punjab National Bank. Notably, Kingfisher airlines once commanded the second-highest market share in India’s aviation industry. However, running on very high debt since its inception, the excess leverage was one of the major reasons for the company’s eventual doom.

Toys ‘R’ Us

The iconic American toys retailer filed for Chpater 11 bankruptcy in September-17. Analysts attributed the company’s fall to its burgeoning $7.9 billion debt pile, which the firm found too heavy to handle. According to a company filing, Toys ‘R’ Us had a $7.9 billion in debt against $6.6 billion in assets. In September-17, the company had more than 100,000 creditors, the most prominent among them being Bank of New York (owed $208 million), Mattel ($136 million) and Hasbro ($59 million).

Eastman Kodak

Once a mighty photograph pioneer, the company had filed for bankruptcy in 2012. Interestingly, the company still operates, but commands a very low profile as a smaller digital-imaging company. At the time of its bankruptcy filing, had $5.1 billion in assets and nearly $6.8 billion in debts. Unable to handle the onslaught of rising competition and its own debt pile, the company had to take the extreme step.

Aircel

In the news currently, India’s sixth-largest telecom operator filed for bankruptcy last week citing unsustainable debt and fierce competition as key reasons behind the step. The company had debt pile over Rs 15,000 crore as of December-17. Aircel said in a statement that intense competition following the disruptive entry of a new player, legal and regulatory challenges, high level of unsustainable debt and increased losses had together caused significant negative business and reputational impact on the company.

In Berkshire Hathaway’s latest annual letter Warren Buffett says that while his aversion to leverage has dampened Berkshire’s returns over the last many years, it has allowed him and Charlie Munger to sleep well.

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