Debt - Long Term

Long-term debt: 

Money from financial institutions to be repaid in a period greater than 12 months; usually larger amounts for larger assets, sometimes secured.

• Mortgage: loan for property purchases where the underlying asset (equipment/factory) is held by the lender as security until full repayment.

• Debentures (Bonds): 3 to 5 year loans organised through money markets (via Investment Banks) to be paid in full upon maturity; interest rate depending upon credit rating of firm. Riskier businesses must pay a higher rate of interest to compensate the lender for the increased risk. Refinancing risk present when ‘rolling over’ debt to new bond issue. These are unsecured loans and usually rely upon the reputation of the borrower.

• Leasing: Type of borrowing; contractual agreement to pay lessor over long-term for the use of an asset. If lease agreement broken, full contractual payment of the entire lease period may be required. This DOES NOT get entered on the Balance Sheet and does not impact Solvency or the Debt to Equity ratio.