What is Net Debt to Estimated Valuation?
Net debt to estimated valuation is a term used in the municipal bond world to compare the value of debt to the market value of the issuer's assets. It is not the same as net debt to assessed valuation.
How Does Net Debt to Estimated Valuation Work?
The formula for net debt to estimated valuation is:
Net Debt to Estimated Valuation = (Short-Term Debt + Long-Term Debt - Cash and Cash Equivalents) / Total Estimated Market Value of Property or Assets
For example, let's assume that County XYZ has $100 million in short-term debt, $400 million in long-term debt and $10 million in cash and cash equivalents. The market value of the county's real property, public utilities, and personal property in the county is $500 million. According to the formula, County XYZ's net debt to estimated valuation is:
Net Debt to Estimated Valuation = ($100 million + $400 million - $10 million)/$500,000,000 = 0.98
Why Does Net Debt to Estimated Valuation Matter?
The lower the net debt to estimated valuation, the less risky a government's bonds tend to be. A higher ratio may indicate a situation in which the sale of the underlying assets may not be sufficient to pay off the debt.
It is often useful to compare the net debt to estimated valuation to the net debt to assessed valuation for an entity, especially when the real estate market is volatile and the value of the municipality's holdings can experience large changes.
