Debt Overhang

AAA

DEFINITION of 'Debt Overhang'

A debt burden that is so large that an entity cannot take on additional debt to finance future projects, even those that are profitable enough to enable it to reduce its indebtedness over time. Debt overhang serves to dissuade current investment, since all earnings from new projects would only go to existing debt holders, leaving little incentive for the entity to attempt to dig itself out of the hole. In the context of sovereign governments, the term refers to a situation where the debt stock of a nation exceeds its future capacity to repay it.

INVESTOPEDIA EXPLAINS 'Debt Overhang'

A debt overhang can trap companies and countries in a vicious downward spiral, as a greater proportion of cash flow or revenues go to servicing existing debt, creating an operating deficit that can only be filled through incremental debt, which adds to the debt burden.

Countries faced with a debt overhang face a steady erosion in living standards, due to reduced spending in vital areas such as education, health and infrastructure.

Eventually, the only way out of a debt overhang is either through forgiveness of part or most of the debt by creditors, through bankruptcy (for a company) or debt default by a nation.

RELATED TERMS
  1. Creditor

    An entity (person or institution) that extends credit by giving ...
  2. Debt

    An amount of money borrowed by one party from another. Many corporations/individuals ...
  3. Overhang

    A measure of the potential dilution to which a common stock's ...
  4. Market Overhang

    An observational theory stating that in certain stocks at certain ...
  5. Net Debt

    A metric that shows a company's overall debt situation by netting ...
  6. Deadbeat

    A slang term for a credit card user who pays off his or her balance ...
RELATED FAQS
  1. What are the pros and cons of getting installment credit to pay off your revolving ...

    Whether it is to finance big-ticket items, cover unplanned emergency expenses or provide a monetary cushion when cash flow ... Read Full Answer >>
  2. Why do some credit cards offer introductory APRs?

    Credit card companies usually offer introductory annual percentage rates (APRs) to attract new customers, preferably those ... Read Full Answer >>
  3. Do lenders offer floating APRs?

    There are floating APRs. APR stands for annual percentage rate, and it must be provided when advertising for credit, as it's ... Read Full Answer >>
  4. Are APRs different in different countries?

    Money lenders of all types, ranging from credit card companies to mortgage lenders, are free to charge any interest rates ... Read Full Answer >>
  5. What loans do and don't have an APR?

    APR means annual percentage rate and if a loan charges interest, it has one. Due to provisions in the 1968 Truth in Lending ... Read Full Answer >>
  6. What is the debt ratio for an FHA loan?

    The Federal Housing Administration (FHA) provides low- and moderate-level income earners the opportunity to purchase a home ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  2. Bonds & Fixed Income

    A Look At National Debt And Government Bonds

    Learn the functions of the U.S. Treasury, and find out how and why it issues debt.
  3. Retirement

    Student Loan Debt: Is Consolidation The Answer?

    Consolidating your student loans offers convenience, but there are drawbacks.
  4. Bonds & Fixed Income

    Why Interest Coverage Matters To Investors

    This ratio represents an important factor of shareholders' returns - find out how to analyze it!
  5. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  6. Credit & Loans

    Consolidating Debt: What If You Have Bad Credit?

    Getting a debt consolidation loan is more difficult when you have bad credit. But it could still help put you on the road to improving your credit score.
  7. Savings

    Why Do Credit Cards Expire?

    Credit cards expire for more reasons than you could imagine – including, so you don't forget you have the card.
  8. Taxes

    The First Thing You Should Do With Your Tax Refund

    Nobody likes to pay taxes, but everyone loves to get a tax refund. When the check arrives in the mail, it's hard to resist spending it on some indulgence.
  9. Credit & Loans

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  10. Credit & Loans

    How to Challenge & Win A Credit Card Dispute

    Found an error on your credit card statement? Five strategies to persuade the card issuer to fix it in your favor.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center