Bond Issuers Meaning Features Types With Examples

Bond Issuers Meaning

Explanation

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.

Features

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

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Entity: They can be non-individual entities only, i.e., bonds can’t be issued by an individual.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.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 amountPrincipal Loan AmountLoan Principal Amount refers to the amount which is actually given as the loan from the lender of the money to its borrower and it is the amount on which the interest is charged by the lender of the money from the borrower for the use of its money.read more upon maturity of the bond.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.

Types of Bond Issuers

#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 bondsTreasury BondsA Treasury Bond (or T-bond) is a government debt security with a fixed rate of return and relatively low risk, as issued by the US government. You can buy treasury bonds directly from the US Treasury or through a bank, broker, or mutual fund company.read more 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.

Examples of Bond Issuers

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.

Advantages

Efficient Allocation of Capital: Bond Issuers play a vital role in capital marketsCapital MarketsA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more 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 capitalCost Of CapitalThe cost of capital formula calculates the weighted average costs of raising funds from the debt and equity holders and is the total of three separate calculations – weightage of debt multiplied by the cost of debt, weightage of preference shares multiplied by the cost of preference shares, and weightage of equity multiplied by the cost of equity.read more as interest on bonds is relatively lower than expected return on equityReturn On EquityReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit.read more.

Disadvantages

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 operationsCash Flows From Its OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more 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 liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more; hence the shareholders might not favor this avenue much.

Conclusion

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.