Who issues: governments, companies and supranational institutions

The first question: who has to pay me

Bonds are often presented as a single family. But lending to a government, a company or an international institution means relying on different borrowers, who pay with money of different origin.

Classifying by issuer answers the first of the three questions of chapter 1: who am I lending to. It does not yet say whether the coupon will be fixed or floating (chapter 5), nor how sound the borrower is (chapter 4). It says where the money that pays you is supposed to come from.

In chapter 1 the issuer of Alfa was “an imaginary borrower”. This chapter explains why that box is the first one to fill in: Alfa would change in nature if it were issued by a government, by a company or by the EIB, even with the same coupon and maturity.

Governments: taxes and new debt

A government bond is a bond issued by a state. The Bank of Italy (Banca d’Italia) sums up the two purposes of issuance: financing the deficit, that is the excess of spending over revenue, and repaying maturing bonds. The money that pays you therefore comes from future taxes and from new debt: as a rule a state rolls its debt over, repaying maturing bonds with new issues. For Italy, types and placement are set out by the Italian Treasury.

That is why, for a sovereign borrower, what matters is the sustainability of its debt, its ability to raise taxes, the stability of its institutions and continuous access to the market: this is what markets call sovereign risk. The currency of the debt matters too: a state that borrows in its own currency, one that shares its currency with other states, as in the euro area, and one that borrows in a foreign currency are in different positions (chapters 4 and 9).

The Bank of Italy notes that, in general, the credit risk of government bonds is lower than that of private issuers from the same country, and that for short-term bonds of several developed countries it is low enough for them to be treated as “risk-free”; Consob observes that a state’s default, “although possible”, is less likely than a company’s. These are analytical conventions, not promises: credit risk exists here too, and the price moves with interest rates (chapter 8).

Two government bonds are not the same thing just because both are “government”. Different states have different finances, currencies and rules: the word says who pays, not how well.

Companies: the cash they generate

A corporate bond is the debt of a company: an industrial group, a bank, an insurer, a services business. The money that pays you comes from the cash the business generates and, if needed, from new financing.

To assess it you look at the company: how much debt it carries relative to the cash it produces, which sector it operates in, how its market is doing. A well-known logo is not a balance sheet, and no single indicator replaces the overall assessment. A sound company can borrow on better terms than a fragile state: “corporate” does not automatically mean a high return, nor high risk.

Banks are companies with their own rules of supervision and crisis management. In a crisis, as seen in chapter 1, their bondholders can be called on to absorb losses after the shareholders. We return to this in chapter 4 with ratings, subordination and repayment priority.

Supranationals: the loans they grant and their members’ capital

A supranational institution is set up by several states: the European Investment Bank (EIB), the European Stability Mechanism (ESM), the World Bank, which comprises two institutions, the International Bank for Reconstruction and Development (IBRD) and IDA, each issuing bonds under its own legal name, and development banks. The European Union itself also issues bonds of its own, distinct from the EIB’s.

For institutions such as the EIB, in ordinary conditions the money that pays you comes from the receipts on the loans granted and from new market funding. Behind it stands the capital its member states have paid in, and the capital they have committed to pay only if ever needed: that is “callable” capital, a pledge by the shareholders to the institution, not a guarantee on the individual bond. Other supranational issuers have different structures: for the European Union the common budget also matters. The EIB’s debt is the EIB’s: it is not the government bond of any single member country, even though the states are its shareholders.

What to look at: statute (the body’s founding rules) and governance, paid-in and callable capital, the quality of the loan book, the terms of the individual issue, starting with currency and maturity. A high credit standing does not remove price risk or currency risk.

The issuer category is not a guarantee

Imagine a bond from a very sound institution, issued in a currency that loses 15% against yours. The borrower pays everything, on time; you, who count in your own currency, still bear the exchange-rate loss. Borrower quality and currency are two distinct aspects to assess: chapter 9 is devoted to currency.

Labels stack up. A bond can be corporate, in euros, floating-rate, senior (that is, ranking ahead of subordinated claims: chapter 4) and maturing in 2031 all at once. Each label answers a different question, and none decides on its own how safe it is.

The real borrower: the legal name, not the brand

A well-known group can have many companies. The bond may be issued by the parent, by an operating subsidiary or by a group finance company, possibly based in another country. You need to read the issuer’s legal name, that is the official name under which the company is registered, not stop at the brand. If a guarantee is mentioned, you need to understand who gives it, on which obligations and with which limits. For the World Bank too you need to identify the precise issuer: IBRD or IDA, for example.

There is one question to ask before buying: who, exactly, has to pay me, and with what money? Chapter 3 shows where to find the answer in the bond’s identity card.

Assumptions of this chapter. We describe the families in ordinary conditions: what happens in crises is in chapters 4 and 14. We talk about families of issuers, not specific bonds: no name is an example to buy; EIB, ESM and World Bank serve to identify the category.

Where you see it on Rebalix

Rebalix’s bond pages are organised by exactly these families: government bonds of the European countries (European Union, Norway, Iceland, United Kingdom and Switzerland), supranational bonds of the main issuers, EIB, ESM, IBRD and IDA included, and corporate bonds: a curated list of large groups, not the whole market. The data comes from the official European register of financial instruments, kept by ESMA.

On the corporate pages each group is resolved to the companies that actually issue: that is the legal name this chapter talks about, not the brand. The pages show neither prices nor ratings: they say who issues, not how sound it is. That is exactly the point of this chapter; we get to soundness in chapter 4.