debt service

noun

|Updated on: 6 Aug 2018

Definition of debt service

: the amount of interest and sinking fund payments due annually on long-term debt

Recent Examples of debt service from the Web

Total debt service is $438 million — a figure Cal doesn’t expect to pay off for a century.

— nanette asimov, San Francisco Chronicle, "Cal scrapped probe of football program promised after 2014 death of player," 31 May 2018
With the convention center, revenue also was used to pay debt service on bonds sold to finance the original construction of the convention center as well as a $22 million expansion completed in the summer of 2011.

— mike nolan, Daily Southtown, "Tinley Park works on tax breaks for prospective new owner of hotel," 21 June 2018
Since, then Kushner Cos. and Vornado have only paid debt service on the senior debt.

— peter grant, WSJ, "Kushner Cos. and LNR Negotiating Debt on Manhattan Skyscraper," 22 May 2018
The tax would help pay the debt service on the $300 million project.

— mike cason, AL.com, "Tax for stadium, renovations at BJCC signed into law," 22 Mar. 2018
State Fair would be paying debt service on … nothing.

— dave kallmann, Milwaukee Journal Sentinel, "Without a major auto race, Milwaukee Mile's future shadows Wisconsin State Fair Park," 15 Jan. 2018
The long-term financing to pay for the new vehicles fits into the town’s debt service at a time when older debts will be paid off and erased.

— bill leukhardt, Courant Community, "Plainville Voters Approve New Firetrucks," 19 June 2018
The cuts were made in hopes of averting — at least temporarily — the closure of the library, which is in dire straits due to a combination of record-low tax collection rates and substantial debt service on a $6 million bond issue.

— zak koeske, Daily Southtown, "Director of cash-strapped Harvey library resigns rather than accept $30K pay cut," 15 May 2018
The entities' funding will largely go towards the debt service on the project.

— erin edgemon, AL.com, "BJCC selects 4 local firms to underwrite $300 million project," 18 Apr. 2018

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'debt service.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of debt service

1929

in the meaning defined above

See Words from the same year

NEW! Time Traveler

Financial Definition of DEBT SERVICE

debt service

noun

What It Is

Debt service is the act of making interest and principal payments on debt.

How It Works

For example, let's say Company XYZ borrows $10,000,000 and the payments work out to $14,000 per month. Making this $14,000 payment is called servicing the debt.

Borrowing money allows companies to make investments without having to commit a lot of their own capital, but the even greater purpose is to maximize shareholder value. As in personal finance, too much debt can be a very, very bad thing, but a little can go a long way. For most investors, it is thus usually unwise to avoid investing in companies with debt; the trick is to find companies that manage their debt well.

This is why companies must consider how debt service fits into their expansion plans if they're using debt to fund the expansion. For example, if Company XYZ is using its borrowed $10,000,000 to build a factory that won't produce anything for five years, how will it service the debt between now and then? In other words, where will it scrape up the cash for those $14,000 payments until the factory is online? And is it sure that the factory will generate at least $14,000 per month once it is online? This is the risk that companies take with debt.

Why It Matters

Companies that issue bonds are perhaps the most well-known debt servicers. They must provide their bondholders with set interest and principal payments on specified dates, and in some cases, must be willing to convert that debt into equity at specified ratios or repay the debt early if certain events occur. When a debtor fails to service its debt, the debtor is sometimes considered in default. In some cases, even the speculation that a debtor might not be able to service its debt can cause its stock price to go down and make it very difficult to obtain financing or other help later.

Because debt service responsibilities can vary among similar companies, some financial measures, particularly EBITDA, intrinsically exclude debt structures in their calculations so comparisons can be made more directly.

Source: Investing Answers