Debt on the Balance Sheet: Maturities, Covenants, and When It Turns Dangerous
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In short
Debt is not dangerous because it is large. It is dangerous because of when it falls due and what happens if the business weakens
Canonical data. Figures tie to Wexford Instruments (USD millions). Interest expense and coverage are covered in the interest and tax article.
— and neither of those is visible in the total. This article describes what makes debt structurally risky without suggesting any level is risky, because the same borrowing that is comfortable for a stable business with long maturities can be fatal for a volatile one facing refinancing next year.
What the balance sheet shows, and what it does not
The face of the balance sheet splits debt into two lines: the portion due within twelve months, and everything else. That is a genuinely useful split and a very coarse one. A company with all its long-term debt maturing in fourteen months and one with it maturing over fifteen years look identical here.
Four things that matter live in the notes rather than on the face. The maturity schedule — how much comes due in each of the next several years, which is what reveals a refinancing concentration. Fixed or floating — a floating-rate borrower's interest cost moves with rates while a fixed-rate borrower's does not until refinancing. Covenants — the conditions the company has agreed to maintain, typically expressed as leverage or coverage ratios. And security — whether lenders have claims over specific assets, which determines who gets paid first if things go badly.
The three questions that actually matter
1. When does it come due? Debt maturing steadily over many years is refinanced in ordinary conditions. Debt concentrated in a single year creates a maturity wall — a date on which the company must refinance whatever the market looks like then. Refinancing risk is timing risk, and timing is not something a borrower controls.
2. How much room is there before a covenant binds? Covenants are the terms on which lenders agreed to lend, commonly requiring leverage below a threshold or coverage above one. A breach does not usually mean immediate repayment — it typically triggers negotiation, waivers, fees, or tighter terms. But it transfers bargaining power to lenders at exactly the moment the company is weakest. The useful reading is therefore not the current ratio but the distance to the limit, and how quickly a downturn would close it.
3. What happens if earnings fall? This is the one that separates comfortable from dangerous, and it is a stress test rather than a measurement. Leverage ratios computed on good earnings understate risk, because the denominator is exactly what falls in a downturn — so a ratio can deteriorate sharply without any new borrowing whatsoever.
Worked example
Worked example: Wexford's debt, and what a bad year does to it (canonical figures, USD millions). The position. Total debt 340.0 — 40.0 due within the year and 300.0 beyond it — against cash of 66.3, giving net debt of 273.7. Debt is 0.65 times equity and 39.4% of total capital. Net debt to EBITDA is 1.82 times and operating income covers interest 5.56 times. Cash covers the amount due within the year 1.66 times. The movement. Wexford repaid 40.0 and raised 20.0, so gross debt fell 20.0 — but cash fell 29.7, so net debt actually rose by 9.7, from 264.0 to 273.7. A company can reduce its borrowings and increase its net indebtedness in the same year, and only the net figure shows it. Now stress it. If EBITDA fell 30% to 105.0, net debt to EBITDA moves from 1.82 to 2.61 times and interest cover from 5.56 to 3.06 times — a sharp deterioration in both, with no additional borrowing at all. And the refinancing test. If the 300.0 of long-term debt were refinanced at three percentage points higher, interest would rise from 18.0 to 27.0, cover would fall to 3.70 times, and net income would drop from 62.3 to 55.5 — down 10.9%, again with nothing changing operationally. Both stresses are arithmetic, not prediction — and they are what the static ratios cannot show you. (Canonical figures; independently verified. Leverage and capital ratios use closing balances; the EBITDA stress holds depreciation at 50.0, so operating income falls to 55.0.)
Frequently asked
7 questions
How much debt is too much?
There's no level that answers this, which is why the article doesn't give one. The same borrowing is comfortable for a stable business with long maturities and dangerous for a volatile one refinancing next year. Timing and earnings stability matter more than size.
What does the balance sheet not tell me about debt?
Four things that sit in the notes: the maturity schedule year by year, whether rates are fixed or floating, what covenants apply, and whether lenders hold security over specific assets. The face gives only a current-versus-long-term split, which can't distinguish debt maturing in fourteen months from debt maturing over fifteen years.
What is a maturity wall?
A concentration of debt falling due in a single year, forcing the company to refinance whatever conditions prevail then. Refinancing risk is timing risk, and the borrower doesn't control the timing.
What happens if a covenant is breached?
Usually not immediate repayment — typically negotiation, waivers, fees, or tighter terms. What it does is transfer bargaining power to lenders exactly when the company is weakest. The useful reading is the distance to the limit and how fast a downturn would close it.
Why do leverage ratios understate risk?
Because the denominator is earnings, and earnings are what fall in a downturn. On the illustration here, a 30% fall in EBITDA takes net debt to EBITDA from 1.82 to 2.61 times and interest cover from 5.56 to 3.06 — with no new borrowing at all.
Can a company repay debt and become more indebted?
Yes, on a net basis. On the illustration, Wexford repaid 40.0 and raised 20.0 so gross debt fell 20.0 — but cash fell 29.7, so net debt rose 9.7. Only the net figure shows it.
What does refinancing at higher rates do?
On the illustration, refinancing 300.0 at three points higher raises interest from 18.0 to 27.0, cuts interest cover to 3.70 times, and reduces net income 10.9% — with nothing changing operationally. It's why fixed-versus-floating and maturity timing are worth finding in the notes.
References
Educational and informational only — not investment advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the possible loss of principal. Worked examples use fictional companies and figures.