Legal Definitions - funded debt

Funded debt refers to a company's or government's long-term financial obligations, typically those with a maturity period extending beyond one year. These debts are usually formalized through instruments like bonds or long-term loans and are often used to finance significant capital expenditures, infrastructure projects, or other long-term investments. Unlike short-term operational debts, funded debt represents a more permanent part of an entity's financial structure, requiring a structured repayment plan over an extended period.

Here are some examples illustrating funded debt:

• A major airline decides to purchase a fleet of new, fuel-efficient aircraft. To finance this multi-billion dollar acquisition, the airline issues corporate bonds with maturity dates ranging from 10 to 30 years.

  Explanation: These corporate bonds represent funded debt because they are long-term financial obligations (10-30 years) used to acquire significant capital assets (new aircraft) and are a structured part of the airline's long-term financing strategy.

• A state government needs to upgrade its aging highway system and build several new bridges. To fund these extensive infrastructure projects, the state issues general obligation bonds to investors, promising repayment over 25 years using future tax revenues.

  Explanation: The general obligation bonds are a form of funded debt for the state. They are long-term (25 years), used for large-scale capital improvements (highways and bridges), and represent a formal, structured financial commitment by the government.

• A university plans to construct a new science research facility and student dormitory complex. It secures a long-term loan from a consortium of banks, agreeing to repay the principal and interest over 15 years.

  Explanation: This long-term loan is considered funded debt because it is a financial obligation with a maturity exceeding one year (15 years), specifically taken out to finance substantial capital projects (new facilities), and requires a structured repayment schedule.