Bond Issuers

Bond Issuers are the entities that raise and borrow money from the people who purchase the bonds (Bondholders), with the promise of paying periodic interest and repayment of the principal amount upon maturity of the bonds.

• Bond issuers are organizations that solicit and borrow money from bondholders with the assurance of making periodic interest payments and repaying the principal amount when the bonds mature.
• A bond issuer technically borrows the money, while the bondholder technically lends it. The bond issuer pays periodic (maybe yearly or semi-annual) interest to the bondholders until the bond matures. The bondholder receives their loaned principal back from the issuer when the bond matures.
• Bond issuers include businesses, governments, supranational organizations, and multilateral organizations. Bond issuers contribute significantly to inefficient capital allocation in the capital markets by collecting money from investors.

An entity needing money can borrow the same by issuing bondholders purchase bonds. Technically, a bond issuer is a borrower, and the bondholder is the lender of the money.

Till the maturity of the bond, the bond issuer pays periodic (can be annual/ semi-annual) interest to the bondholders. Upon maturity, the issuer returns the principal amount borrowed to the bondholder.

The following are a few of the features of Bond Issuers:

1. Entity: They can be non-individual entities only, i.e., bonds can't be issued by an individual.
2. The requirement of Money: Bond issuers issue bonds when they require funds for various reasons ranging from daily operational needs to need for funding expansion for growth of the business, etc.
3. Contractual Promise for Payment: They enter into a contract by way of the issue of bonds whereby they are liable to pay periodic interest to bondholders and to repay the principal loan amount upon maturity of the bond.
4. Rating: To issue a bond, Bond issuers are recommended, if not required, to get a credit rating from a credit rating agency. The rating tells about the issuer's creditworthiness, i.e., its ability to pay the interest and principal. For example, the rating of a developed country like the US would be higher than any developing country like Thailand, implying that the bonds issued by the US would be relatively less risky than those issued by Thailand.

#1 - Corporations

Corporations are one of the largest categories of Bond Issuers. Corporations include financial institutions, public sector undertakings, and other private companies. Both private and public corporations issue bonds to raise money for various reasons. These may range from funding their day-to-day operations to expanding their existing businesses.

For example, Microsoft, Apple, and Facebook might issue bonds to finance their needs. Here these three entities are the bond issuers.

#2 - Governments

A nation's government issues bonds with funding its various welfare measures or other investment purposes. They usually pay out interest on bonds and repay the principal from their revenue, such as taxes. The government is generally considered relatively less risky than corporate issuers.

For example, the US government issues treasury bonds with borrowing money. The full support of the government backs these bonds.

#3 - Supranational and Multilateral Entities

These are entities that are not based in a particular nation. It includes entities like World Bank, International Monetary Fund (IMF), etc. These issuers are also highly rated and less risky because of their global standing.

World Bank issues between US$50-US$60 billion annually to finance programs supporting the Sustainable Development Goals.

For example, ABC Ltd. is considering raising money by issuing bonds to fund its upcoming project. It issues 5-year bonds of ₹500 crores to the investors, agreeing to pay 9% interest semi-annually to the bondholders. After five years, it will repay the amount borrowed along with interest.

Here, ABC Ltd. is the Bond Issuer.

A few recent examples of Corporate Bond Issuers are:

• A US-based airplane manufacturer, Boeing, has recently issued bonds and raised money to US$25 billion in April 2020.
• Indian conglomerate Reliance Industries Ltd. raised ₹8,500 crores in three-year bonds in April 2020.

• Efficient Allocation of Capital: Bond Issuers play a vital role in capital markets by participating via issuing bonds. The excess capital with some investors can be deployed to more productive use when investors lend that money to bond issuers for their use.
• Dependency on Equity Capital:  Dependency on raising money via equity shares is reduced when a company can raise money by acting as a bond issuer.
• Lower cost of Capital: The cost of raising capital by issuance of bonds is lower than the cost of raising capital by equity. This helps the issuer reduce its overall cost of capital as interest on bonds is relatively lower than expected return on equity.

• Fixed Interest Obligation: Since there is a periodic interest payment that is required to be made by the bond issuers in the case of bonds, this would increase the fixed cash flow burden to the issuer even when the issuer is not able to generatecash flows from its operations due to economic downturn. Interest in bonds is mandatory to pay, whereas the dividend on equity shares is optional; hence, an issuer in a difficult financial situation might be disadvantaged by raising money through bonds.
• Limitations on Use: Bond Issuer might be mandated by the bond agreement to use the proceeds of the bonds in certain areas only. This would lead to limited power and control over the issuer over where the borrowed money should be used.
• Detrimental to shareholders in case of Liquidation:  A corporation must pay the interest and principal when they are due, despite the financial condition of the issuer. The bondholders have a preference over shareholders upon liquidation; hence the shareholders might not favor this avenue much.

Bond Issuers play an important role in the capital markets, helping the inefficient allocation of capital by raising money from the investors. Issuers get the desired money for carrying out their projects or daily activities, and bondholders also get a decent return on their excess capital. Issuers play that link between the excess capital with the investors and the investment project, which requires funds for their usage.

This has been a guide to Bond Issuers and its meaning. Here we discuss features, types, and examples of bond issuers along with advantages and disadvantages. You may learn more about financing from the following articles –

• Fidelity Bonds
• Revenue Bonds
• Mortgage Bond
• General Obligation Bond