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. Delinquent Account (Credit Card)

    A credit card balance on which a consumer has failed to make ...
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

    Do lenders offer floating APRs?

    Learn about credit cards with floating, variable and fixed APRs. Explore introductory rates offered by two leading credit card issuers.
  7. Credit & Loans

    Why do some credit cards offer introductory APRs?

    Understand how introductory APRs from credit card companies can help or hurt your personal finances. Learn how to use these offers to your advantage.
  8. Credit & Loans

    Are APRs different in different countries?

    Learn about the term APR and how it is used in the United States and other countries. Explore why different lenders charge different APRs.
  9. Credit & Loans

    What loans do and don't have an APR?

    Learn about what annual percentage rates (APR) are and what they mean. Explore different fixed and variable APRs charge by different lenders.
  10. Credit & Loans

    What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information relating to total outstanding debt.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center