Debt Glossary

Simon Underwood - Menzies Accountant

Simon Underwood – Business Recovery Partner

There are a number of different ‘debt’ related terms. The aim of this glossary of debt is to provide concise and accurate definition of all debt related terms. 

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Understanding the different types of debt

Commercial debt

Commercial debt is often used as a way for companies to finance projects for day-to-day operations. This debt term refers to debt owned by a private sector creditor. In most cases the private creditor is a commercial bank. This type of debt can take the form of a short term, intermediate term or even long-term loan.

Corporate debt

Corporate debt refers to debt that is owed by businesses rather than by private individuals or governments. 

Corporate debt refinancing

Corporate debt refinancing refers to an action taken by a company when it chooses to reorganise its financial commitments by replacing or restructuring its existing debts. The decision to do this is often taken due to changing financial climates where more favourable financing options may become available. 

Corporate debt restructuring (CDR)

Corporate debt restructuring, commonly abbreviated to ‘CDR’, refers to the situation where financial institutions and banks come together to restructure the debt of companies that are facing difficulties financially due to either internal or external factors, in order to provide support to companies in a time of need. 

Debt capital 

Debt capital is the capital that a business raises by taking out a loan. The loan made to the company is in most cases repaid at a pre-determined future date. 

Debt financing

Debt financing is used to describe the process where a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors. The benefit for the lender is that they will receive interest on the debt being repaid. 

Debt instrument

Debt instrument describes when a paper or electronic obligation is made which enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract. There are different types of debt instruments including bonds, mortgages, debentures and other agreements between the borrower and lender. 

Debt refinancing

Debt refinancing refers to the process of replacing an existing debt obligation with another debt obligation that is under different terms. Most commonly, debt refinancing is done to take advantage of more favourable financial conditions.   

Debt relief  

Debt relief, also known as debt cancellation, refers to the partial or total pardon of debt. It also refers to the slowing or stopping of the growth of debt owed by private individuals, corporations or nations. 

Debt service

Debt service refers to the money that is required to cover the repayment of interest on debt over a defined period of time. 

Debt settlement

Debt settlement is a term used to describe a debt reduction approach whereby the debtor and creditor agree on a reduced repayment that will be regarded as the payment in full. This method of repaying debt has a negative impact on your credit rating.

High yield debt

High yield debt is a phrase sometimes used in finance to describe when a high yield bond is deemed to be below investment grade. High yield bonds have a very high risk of default or are vulnerable to other adverse credit events. These bonds are attractive to investors because despite the risk they typically pay much higher yields than better quality bonds.    

Illiquid debt 

The term illiquid debt is used to indicate the state of a security or other asset that cannot be easily sold or exchanged for cash without suffering from a substantial loss in value. In most cases illiquid assets are also difficult to sell quickly due to a lack of interest from investors willing to purchase the asset.

Infrastructure debt  

Infrastructure debt refers to the fixed income component of assets in the form of structures and facilities. It provides yield enhancements, especially for those dealing with the preservation of capital.

Internal debt 

Internal debt, also referred to as domestic debt, is a term used to describe the part of the total government debt in a country that is owed to lenders within that country.

Judgement debt 

Judgement debt refers to an amount of money that a court of law has ordered a company or an individual to pay. 

Long term debt 

Long term debt refers to sum of money that is owed for a period exceeding 12 months from the date of the balance sheet. 

Margin debt 

Margin debt is used to describe the brokerage a customer takes on by trading on a margin. When purchasing securities through a broker, the investor can either cover the entire cost of the investment themselves or use a margin account, which involves borrowing part of the required capital for a broker. The amount that the investor borrows is known as margin debt. The amount they fund themselves is known as the margin. 

Mezzanine debt 

Mezzanine debt occurs when a hybrid debt (debt with some features of equity) issue is subordinated to another debt issue from the same issuer. Mezzanine debt includes embedded equity instruments, which increase the value of the subordinated debt and permit increased flexibility when dealing with bondholders. This type of debt is most frequently related with acquisitions and buyouts, for which it may be used to prioritise new owners ahead of existing owners in case of bankruptcy. 

Net financial debt 

Net financial debt demonstrates a company’s overall financial situation. It is calculated by subtracting the total value of its cash and other liquid assets from the total of its short and long-term debt. 

Outstanding debt

Outstanding debt refers to debt that has not been repaid in full. For example, if someone borrows £25,000 and pays back £20,000, then their outstanding debt totals £5000. 

Structured debt 

Structured debt is a term used that describes when debt has been tailored specifically for the borrower by the lender. Structured debt often includes options to incentivise the borrower to do business with the lender.  

Total debt 

Total debt is a term used to describe organisational finances from the macro perspective. This means that the business takes a look at how the business stands with regards the total of its debt.  

Toxic debt 

Toxic debt is used to describe loans or other types of debt that have a low chance of being repaid with interest. Toxic debt is ‘toxic’ to the person or institution that lent the money and should be receiving payments with interest. Any debt that damages the financial position of the lender can be considered toxic.

Venture debt 

Venture debt, also known as venture lending, is a type of debt financing provided to venture-backed companies by specialised banks or non-bank lenders used to fund working capital or capital expenses.   

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