Peak Debt

Life goes in cycles. Up. Down. Up. Down. Business runs that way, too. And so do companies, at times.

So consider one cycle: a cable company is faced with the sad fact that it needs to massively upgrade its old copper wire infrastructure in delivering TV shows and internet, um, "art films"...to fiber optics. The process will cost $8 billion and take 6 years to fully execute. Unfortunately, they don't have a spare 8 gig just lying around. So they have to borrow it.

And yes, profits come in as the company goes along. They borrow $1.5 billion to start; then, after a year, half a bil comes in, so total net debt is $1 bil. The following year, another $2 billion, and the next year, $3.5 billion, and then by the last year, they just need to borrow half a bil more.

As they took out debt, some was paid off. So they never had total debt of $8 billion. Instead, they had peak debt at one point, in one quarter of this process of $6.5 billion. Under the new fiber optic super-zap-it-fast system, they were able to raise prices 20% and massive profits flowed in. The company was then able to pay down its peak debt of $6.5 billion to be a more reasonable and manageable $4 billion pretty quickly.

Peak debt happens in companies undergoing massive capital upgrade cycles. They're painful and risky. Should something go wrong when they are at peak loads, there's a decent chance the whole company goes under. And that would be a horror film, not an art one.