Who is an issuer?
This is the entity that issues bonds and can be any legal entity within a group of companies. In contrast, if a group of company issues shares to investors, then the entity that issues the shares is the ultimate holding company. This is because the shares trading in the stock market represent the residual interest in all cash flows of that group of companies.
There are advantages to bond holders of having bonds issued by entities that are close to the operating cash flows:
- The bond holders have a clear view of the cash flows that directly underpin their contracted payments. It protects them by reducing the opportunity for cash flow to be diverted from them to other companies of the group.
- The bond contract is directly with the legal entity that generates the cash flows to pay the bond holders. If the issuer should get into financial difficulty, then the contract offers the bond holders better protection than if the contract were with a group entity.
An understanding of corporate structures is therefore crucial to credit analysis.
The credit quality of the issuer plays a major role in determining the coupon and maturity of the bond at the point of issue. For example, all other factors being the same, a sovereign issuer would be expected to receive better terms than a corporation. This is principally because governments have the power to raise taxes to honour future commitments but corporations rely on generating profits that are more uncertain.
While the ability to pay is important, willingness to pay also plays a role in determining credit quality. For instance, although governments have the power to raise taxes it does not mean that they will do so just to pay bond holders, political considerations will also influence their decision and so politics will impact the sovereign issuers’ credit quality.