Debt Overhang
You know in movies when someone almost drives off a cliff, but stops just before the fatal plunge, leaving the car teetering precariously half on and half off the edge, where any slight weight shift (a bird landing on the hood, etc.) could push it into the abyss? Thelma and Shmoop comes to mind.
Same concept as the debt overhang.
If a company (or a person for that matter) has so much debt that no one will loan it additional money, then that constitutes a debt overhang. Basically, bankers judge that the firm is the car hanging over the edge of the cliff; one more dollar of debt dropped on the hood and down it goes.
This can lead to a situation where even a smart loan (for a sure-fire product launch or a pays-for-itself technology upgrade) won't get approved. At that point, it becomes very difficult for the company to accelerate growth, because the debt overhang cripples the firm's ability to secure additional loans. Debt death spirals ensue. And there's a car. And a cliff.
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Finance: What is Debt?62 Views
finance a la shmoop.. what is debt..well debt happens anytime you or anyone else
or anything else borrows money and promises to pay it back countries borrow [Hands out looking to borrow cash]
money from their citizens and from other countries
Granny borrows money from the equity in her house to pay for her full body skin [Granny getting a full body skin procedure]
lift procedure, ew! you'll probably borrow money to go to college buy a car
and buy a home credit cards are golden or plastic
tickets that let you easily borrow relatively small amounts of money to you
know buy stuff so there are tons of types of debt and to really understand [lots of examples of debt]
it all you have to think about debt from both sides of the equation that is you
as the borrower want the most flexible payback terms the cheapest interest
rates to rent that money and the least amount of grief if you're ever late on a
payment but what if you're the lender well you only have so much money to lend [woman walking and approaches a vault of cash]
and you want to maximize your returns while being smart about risk that is if
you loan 10 grand to 10 people and 9 of them pay you a fat 10% a year but one of [woman at a stand giving loans to people]
them absconds with your money to Brazil with senorita maracas well then
all your work was for nothing more or less when the interest just paid back
the lost principal on the one who absconded and yeah one bad loan can wipe
out the returns of your entire portfolio your billion bucks was supposed to produce [Man falls in water while surfboarding]
a hundred million in interest gains but when one of the ten hundred million
dollar investments died and well you ended up sitting on a billion and that's
it so no jet for you so would you loan money to your slacker friend Flaky McGee [Flaky McGee and Bill Gates together]
for the same rent as you lend to Bill Gates while Flaky McGee has a history of
you know flaking hence the name. so you'd have to take the risk of him [Flaky McGee in the kitchen with his Mom]
not paying you and you'd have to track him down in Rio or get lawyers to take
possession of the skateboard collateral he pledged for the loan and then sell it [Lawyers taking Flaky McGee's skateboard as collateral]
on eBay and hopefully get most of your money back
we'll go on record saying that you'll likely charge Flaky McGee a lot more in
interest and make the terms and conditions much more brutal than you [Terms and conditions for Flaky's loan]
would for dear old Bill well one big thing people don't seem to understand is
that debt is just about someone renting money debt does not involve ownership of
anything other than the promissory paper that contractually outlines the debt
terms the only time debt does involve ownership is when the piece of paper has [Flaky sat on a toilet]
been well you know made into toilet paper because the debtor flaked and
didn't pay back the loan that they promised to pay at that point the one
who loaned the money usually has every right to take back the collateral [Man drives car away from Flaky]
pledged behind the debt and if that collateral can't be found to break knees
you know the guys with the baseball bat remember? you ever see The Sopranos well so [Flaky screaming while on the toilet]
if you ever find yourself in that position make sure to you know hide your
knees
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