Corporate debt

Corporate debt is that amount of money borrowed by companies.

That is, corporate debt is the money that companies borrow. Money they can get through banks, the stock market or private banking investors, among others.

Although it might seem the same as private debt , it is not. Corporate debt is a part of private debt, since there are other economic agents that integrate it. For example, homes and nonprofit institutions. At the same time, it can also be part of the public debt , since there are companies that are invested by the Government.

Nor should it be confused with corporate bonus . A bond is a type of instrument, but other corporate instruments such as bills, promissory notes or obligations are included in the corporate debt.

Types of corporate debt

Within corporate debt we can continue branching, since depending on the size of the company or the sector to which it belongs, it could have some characteristics or others.

Usually, when mentioning the concept, reference is made to the debt of companies that are listed. However, its definition is much broader and it enters companies that are not necessarily quoted.

In this sense, as we see, there are many possible classifications:

  • According to the sector
  • Whetheror not it is publicly traded
  • Depending on the size of the company
  • Credit rating
  • Credit quality
  • Risk
  • Type of instrument
  • By the nature of the issuer
  • Depending on the coupon they pay
  • Types of amortization
  • Interest rates
  • Expiration Term

As we see there are many different possible classifications, each of which can give a lot of itself. We could not indicate that one of them is more important than the others, since that will depend on the context in which one is working. Now, having clarified this, credit quality and risk are aspects that could stand out over others. That is, the ability of the company to deal with payments on time and in form. Or, in other words, the company’s ability to repay the debt. A detail, that of credit quality, which we should not confuse with credit rating.

The credit rating or rating is the note that agencies put on debt. At lower risk, better grade. And vice versa, at higher risk, worse note. That said, it is assumed that rating and credit quality or risk must coincide, but reality has shown that it is not necessarily so. Hence, the investor should pay attention to this when investing.

State and corporate debt

Corporate debt, a priori, has a higher risk than state debt. [Note that here we differentiate corporate debt from government debt, knowing that part of the corporate debt could be public and, therefore, in charge of the government]. That the corporate debt has a higher risk than the state debt, ‘justifies’ that the coupons paid by the state debt are lower than those of the corporate debt. Since if the risk of default on the government debt is lower, a smaller coupon is justified.

However, in honor of the truth, this is not always the case. Countries, because of their status as a nation, have a harder time going bankrupt. But, nevertheless, this does not indicate that your accounts are more healthy. There are companies that are much more financially sound than some countries and still obtain financing at a more expensive rate than governments.

It is important to take this into account when analyzing, studying or investing in corporate and / or state debt.


by Abdullah Sam
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