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Debt limitation

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Definition of Debt limitation

Debt Limitation Image 1

Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.



Related Terms:

Interest coverage test

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's
interest coverage would, as a result of the issue, fall below some specified minimum.


Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.


Bad debt

An account receivable that cannot be collected.


Bad debts

The amount of accounts receivable that is not expected to be collected.


bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.



Cost of Debt

The cost of debt (bonds, loans, etc.) that a company is charged for
borrowing funds. A component of the cost of capital.


Debt

Money borrowed.


Debt Limitation Image 2

Debt

Borrowings from financiers.


Debt

Funds owed to another entity.


Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.


Debt Capacity

An assessment of ability and willingness to repay a loan from anticipated future cash flow or other sources.


Debt (Credit Insurance)

Money, goods or services that someone is obligated to pay someone else in accordance with an expressed or implied agreement. debt may or may not be secured.


Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.


Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.


Debt/Equity Ratio

A comparison of debt to equity in a company's capital structure.


Debt Financing

Raising loan capital through the creation of debt by issuing a form of paper evidencing amounts owed and payable on specified dates or on demand.


Debt Limitation Image 3

Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.


Debt Instrument

Any financial asset corresponding to a debt, such as a bond or a treasury bill.



Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.


Debt market

The market for trading debt instruments.


Debt ratio

Total debt divided by total assets.


Debt Ratio

The percentage of debt that is used in the total capitalization of a
company. It is calculated by dividing the total book value of the
debt by the book value of all assets.


Debt relief

Reducing the principal and/or interest payments on LDC loans.


Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.


Debt Security

A security representing a debt relationship with an enterprise, including a government
security, municipal security, corporate bond, convertible debt issue, and commercial
paper.


Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.


Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.


Debt Limitation Image 4

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).



Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.


debt-to-equity ratio

A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.


Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.


Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.


Debtors

Sales to customers who have bought goods or services on credit but who have not yet paid their debt.


Dividend limitation

A bond covenant that restricts in some way the firm's ability to pay cash dividends.


Firm's net value of debt

Total firm value minus total firm debt.


Funded debt

debt maturing after more than one year.


funded debt

debt with more than 1 year remaining to maturity.


Interest rate on debt

The firm's cost of debt capital.


Junior debt (subordinate debt)

debt whose holders have a claim on the firm's assets only after senior
debtholder's claims have been satisfied. Subordinated debt.


Limitation on asset dispositions

A bond covenant that restricts in some way a firm's ability to sell major assets.


Limitation on liens

A bond covenant that restricts in some way a firm's ability to grant liens on its assets.


Limitation on merger, consolidation, or sale

A bond covenant that restricts in some way a firm's ability to
merge or consolidate with another firm.


Limitation on sale-and-leaseback

A bond covenant that restricts in some way a firm's ability to enter into
sale and lease-back transactions.


Limitation on subsidiary borrowing

A bond covenant that restricts in some way a firm's ability to borrow at
the subsidiary level.


Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also
called funded debt.


Long-term debt

A debt for which payments will be required for a period of more than
one year into the future.


Long Term Debt

Liability due in a year or more.


Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.


Long-term debt ratio

The ratio of long-term debt to total capitalization.


Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.


Mezzanine Debt

Refers to non-conventional debt that has a greater element of risk than secured debt but has less risk than equity.


MM's proposition I (debt irrelevance proposition)

The value of a firm is unaffected by its capital structure.


Monetizing the Debt

See printing money.


National Debt

The debt owed by the government as a result of earlier borrowing to finance budget deficits. That part of the debt not held by the central bank is the publically held national debt.


Original issue discount debt (OID debt)

debt that is initially offered at a price below par.


Public Debt

See national debt.


Publicly Held National Debt

See national debt.


RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)


Secured debt

debt that, in the event of default, has first claim on specified assets.


secured debt

debt that has first claim on specified collateral in the event of default.


Senior debt

debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.


Senior Debt

Are debt instruments that provide financing, take primary security against either specific or all assets of the borrower, have fixed terms of repayment and charge fixed or floating interest rates.


Structured debt

debt that has been customized for the buyer, often by incorporating unusual options.


Subordinated debt

debt over which senior debt takes priority. In the event of bankruptcy, subordinated
debtholders receive payment only after senior debt claims are paid in full.


subordinated debt

debt that may be repaid in bankruptcy only after senior debt is paid.


Subordinated Debt

debt instruments that provide financing for acquisitions, expansion and restructuring, take secondary security against assets, have fixed or flexible terms of repayment and charge fixed or floating interest rates.


Total debt to equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.


Total Debt to Total Assets Ratio

See debt ratio


Trade debt

Accounts payable.


Unfunded debt

debt maturing within one year (short-term debt). See: funded debt.


Unsecured debt

debt that does not identify specific assets that can be taken over by the debtholder in case of default.



 

 

 

 

 

 

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