Guide to Analysing Companies

Debt service ratio
The ratio of a country’s annual repayments on its foreign debt to
the value of its annual hard-currency earnings from
exports. The ratio is used as a guide to a country’s creditworthiness,
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DEBT SERVICE RATIO
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or lack of it. For many Latin American countries in the 1980s the
ratio was well over 100%. All their hard-currency export earn-
ings (and more) went to service the debt to foreign banks and
governments. Even in 2001, Latin America’s ratio of debt service
to exports as a whole was over 50%, twice as high as that of
other regions. It is perhaps not surprising, therefore, that Ar-
gentina chose at the end of that year to default on its debt to
foreign banks and institutions.
Blessed are the young, for they shall inherit the national debt.
Herbert Hoover
Default
Failure to repay a loan or a bond according to the terms of
a contract. The first step in default is usually to cease pay-
ments of interest on the loan, let alone repayments of any
principal owed. Once a borrower is in default there are
various legal moves that a lender can make to try to recover
the money, or to get hold of any underlying security
backing the loan. In most cases, it is in the creditors’ interests to
club together to find a way of rolling over or working off the
amount owed.
Sovereign debt – the obligation of nations – was widely thought to have
the least chance of default. In fact, it was more volatile and carried a
greater risk than the debt of companies or even individuals.
Michael Milken
Defeasance
The placing of assets, like cash or treasury bills, in
trust by the issuer of a bond. All the interest and princi-
pal due on the bond are subsequently repaid out of these assets
by the trustee.