What is the Current Portion of Long-term Debt?
Current Portion of Long-Term Debt (CPLTD) is the long term portion of the debt of the company which is payable within the period of next one year from the date of the balance sheet and these are separated from the long term debt on the balance sheet as they are to be paid within next year using the company’s cash flows or by utilizing its current assets.
Let us look at the chart of Exxon above. It tracks the current portion of debt vs. non-current portion debt of Exxon for the past five years. We note that during 2016, Exxon had $13.6 billion of the current portion of long-term debt as compared to $28.39 billion of the non-current portion. However, in the year of 2013 and 2014, Exxon’s CPLTD was far greater than that of the non-current portion.
Current Portion of Long Term Debt Example
SeaDrill Limited (NYSE: SDRL) has a total long-term debt of $9.8 billion and is expected to pay $3.1 billion in the current year. Hence, it recorded $6.6 billion as long-term debt and $3.1 billion as a current portion of long-term debt at the end of the fourth quarter of 2016.
The snapshot below shows the balance sheet of SeaDrill Limited.
Source: SeaDrill Limited
As observed in the graph above, the SeaDrill balance sheet doesn’t paint a good picture because its CPLTD has increased by 115% on a year-over-year basis. It is because SeaDrill doesn’t have sufficient liquidity to cover its short-term borrowings and current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.. In other words, SeaDrill has a high amount of current portion of long-term debt as compared to its liquidity, such as cash and cash equivalent. This suggests that SeaDrill will find it difficult to make its payments or pay off its short-term obligation.
Note: The thumb rule states that a company with a high number in its CPLTD as compared to a small cash position has a higher risk of default.
The same goes for SeaDrill that has a high number in its current portion of long-term debt and a low cash position. As a result of this higher CPLTD, the company was on the verge of defaulting. According to simplywall.st, SeaDrill proposed a debt-restructuring plan to survive the industry downturn. As per this scheme, the company plans to renegotiate its borrowings with the creditors and has a plan to defer most of its CPLTD.
However, this move had a negative impact on its share price performance because the company saw its share price falling more than 15% last month. In fact, this was the second announcement regarding its debt restructuring planDebt Restructuring PlanDebt restructuring is a refinancing process whereby the company facing cash flow issues arranges with lenders to renegotiate favourable or flexible terms, saving themselves from bankruptcy. The lenders may choose to lower the business rate or increase the time limit for paying the interest and principal amount. as the company was not able to please the creditors as per its earlier given date of December 30, 2016. This time the company has pushed the deadline to the end of April 2017.
In the case of SeaDrill, the company is not able to pay its CPLTD due to a historical weakness in the crude oil sector and poor market conditions. For instance, the crude oil prices fell more than 50% since the high of $100 per barrel in 2014 to close to $50 per barrel at present due to the oversupply of crude oil and increase in the inventories in the United States.
Debt is an important component of the company’s total capital. It creates financial leverageFinancial LeverageFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. , which can multiply the returns on investment provided the returns derived from loan exceeds the cost of loan or debt. However, it all depends if the company is utilizing the debt taken from the bank or other financial institution in the right manner. Meanwhile, the current portion of long-term debt should be treated as current liquidity as it represents the principal part of the debt payments, which are expected to be paid within the next twelve months. If not paid within the current twelve months, it gets accumulated and has an adverse impact on the immediate liquidity of the company. As a result, the company’s financial position becomes risky, which is not an encouraging sign for investors and lenders.