Long-term debt is one of the most looked-at items on a balance sheet. It is scrutinized for many reasons: Bankers often issue or monitor long-term debt extended to entities, treasury groups look at their own company’s leverage to make sure they are optimally funding the company, and anyone involved in understanding the credit risk of a firm is looking at long-term debt since its characteristics contribute dramatically to default risk. Regardless of perspective or reason, analyzing long-term debt requires thorough explanation and study because it can be very complicated to model debt schedules correctly. Even more complicated is integrating debt schedules into a fully dynamic model. Our approach in this chapter will be to first look at the core concepts of debt and then learn how to implement and integrate long-term debt into the example model through Model Builder examples.
WHAT IS LONG-TERM DEBT ?
First, we should understand what bankers issue that constitutes long-term debt. This is usually broken down into two separate subcategories: loans and bonds. Loans are typically issued between a bank and the company. Long-term loans have a maturity greater than 12 months from the analysis date and have detailed documentation that guides the payment of interest and principal each period. This documentation also directs the payment priority when multiple issuances of debt are created. Similarly, bonds with maturities greater than 12 months are liabilities of ...