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Home » What is soft debt?

What is soft debt?

Soft debt refers to a type of financial obligation where repayment is either not required, deferred, or forgiven. This debt often involves transactions with related parties, such as loans from sponsors to ownership entities in which the sponsor holds an ownership interest. Alternatively, soft debt may be structured to be repaid solely from surplus cash flow or under specific conditions.

In many cases, soft debt arrangements are established within closely related entities, where there is a significant level of trust or mutual interest. These arrangements can include loans from sponsors or stakeholders to the entities they have a stake in, with repayment terms that are more flexible compared to traditional debt. For instance, repayment may be contingent on the availability of excess cash flow, allowing the borrowing entity to prioritize its operational needs.

Soft debt can serve as a strategic tool in financing arrangements, particularly in scenarios where traditional lending institutions may be hesitant to extend credit. By offering more lenient repayment terms or forgiving portions of the debt, stakeholders can provide crucial financial support to the entities they are invested in, fostering growth and stability.

(Response: Soft debt refers to financial obligations with flexible repayment terms or forgiveness, often involving related parties or contingent on excess cash flow.)