Investment-Grade Bonds, Speculative-Grade Bonds ( High-Yield Bonds, or “HYBs”), Convertible Bonds, Mezzanine Securities The two distinct types of debt structures are as follows. The required rate of return is higher for non-senior lenders lower in the capital structure as these lenders require more compensation for undertaking incremental risk. Subordinated Debt: What is the Difference? If a company defaults on a debt obligation and undergoes liquidation, the seniority of each creditor determines the order in which lenders would receive proceeds (i.e. For example, paying a lender with lower priority ahead of a senior lender is a clear violation unless explicit approval was provided. Loan agreements are legally-binding contracts with specific requirements that must be followed. a “bullet” lump-sum payment of the remaining principal). Principal Repayment → On the date of maturity, the original principal amount must be repaid in full (i.e.Mandatory Amortization → Typically associated with senior lenders, mandatory debt amortization is the required incremental paydown of the debt principal throughout the lending term.the amount charged by the lender to the borrower throughout the term of the debt (i.e. Interest Expense → The cost of borrowing debt capital – i.e.In exchange for capital from the lender(s), the borrowers agree to terms such as: The parties involved in a lending arrangement – or more specifically, the borrower and lender(s) – are entering a contractual legal agreement. The purpose behind modeling the debt schedule is to forecast the balances of outstanding debt securities and the amount of interest expense coming due in each period.įor a company raising debt financing, it is essential to determine the impact of the new debt on its free cash flows (FCFs) and credit metrics. How to Build a Debt Schedule (Step-by-Step) Not only does the debt schedule estimate the debt capacity of a company, but it can also serve as a tool to anticipate upcoming cash shortfalls that would require additional funding. A Debt Schedule is used to keep track of all outstanding debt balances and related payments, namely mandatory principal amortization and interest expense.
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