Corporate debt

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Corporate debt is the amount of money that companies have borrowed.

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

Although it may seem the same as private debt, it is not. Corporate debt is a part of private debt, since there are other economic agents that make it up. For example, households and non-profit institutions. At the same time, it can also be part of the public debt, since there are companies that are owned by the Government.

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

Corporate finance

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 the concept is mentioned, it refers to the debt of companies that are listed. However, its definition is much broader and includes companies that are not necessarily listed.

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

  • According to the sector
  • Whether or 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
  • Amortization types
  • Interest rates
  • Expiration period

As we can see, there are many different possible classifications, each of which can go a long way. We could not indicate that one of them is more important than the others, since that will depend on the context in which you are working. Now, having clarified this, credit quality and risk are aspects that could stand out above the others. That is, the ability of the company to meet payments in a timely manner. Or, put another way, the company's ability to repay the debt. One detail, that of credit quality, that we should not confuse with credit rating.

The credit rating or rating is the note that the agencies place on the debt. The lower the risk, the better the score. And vice versa, the higher the risk, the worse the grade. That said, rating and credit quality or risk are supposed to coincide, but reality has shown that this is not necessarily the case. 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 a part of the corporate debt could be public and, therefore, borne by the government]. The fact that corporate debt has a higher risk than state debt "justifies" that the coupons paid for state debt are lower than those for corporate debt. Since if the risk of default on government debt is lower, a lower coupon is justified.

However, to be fair, this is not always the case. Countries, because of their nationhood, have a harder time falling into bankruptcy. But, still, this does not indicate that their accounts are more healthy. There are companies that are much more financially healthy than some countries and still obtain financing at a more expensive rate than governments.

It is important to keep this in mind when analyzing, studying or investing in corporate and / or state debt.

Tags:  culture derivatives banking 

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