What Is a Debt Issue?
Let me explain what a debt issue is: it's a financial obligation that lets the issuer raise funds by promising to repay the lender later, according to the contract terms.
You can think of a debt issue as a fixed obligation from a corporation or government, like a bond or debenture. It also covers notes, certificates, mortgages, leases, or other agreements between the borrower and lender.
Key Takeaways
A debt issue means offering new bonds or debt instruments to borrow capital. These are usually fixed obligations such as bonds or debentures. In this setup, the seller promises you, the investor, regular interest payments and repayment of the principal on a set date. Companies use debt for capital projects, and governments for social programs and infrastructure.
Understanding Debt Issues
When a company or government needs a loan, they can go to a bank or issue debt to investors in the capital markets. I’m talking about issuing a debt instrument to fund projects or refinance debt—this is a debt issue. It’s often better than a bank loan because it doesn’t limit how you use the funds.
Essentially, a debt issue is a promissory note where the issuer borrows from the buyer, who acts as the lender. Investors buy it, and the issuer uses the money for projects. In return, you get promised interest payments and the principal back on a future date.
Corporations and governments at various levels issue these to raise funds. Companies do it for projects or market expansion. Governments fund social programs or infrastructure. The issuer pays interest, called the coupon rate, on a schedule.
Special Considerations
Remember, by issuing debt, the entity can use the capital freely. At maturity, the issuer repays the face value, or par value, which varies: $1,000 for corporate bonds, $5,000 for municipal, $10,000 for federal.
Maturities range from short-term (1-5 years) to medium (5-10 years) to long-term (over 10 years). Some companies like Coca-Cola or Walt Disney have issued 100-year bonds.
The Process of Debt Issuance
For corporate debt, the board approves it if cash flows support interest payments. They send a proposal to investment bankers and underwriters. It’s issued through underwriting: firms buy the issue, form a syndicate to sell to investors. The interest rate depends on credit rating and demand, with fees to underwriters.
Government debt works differently, often via auction. In the US, buy directly through TreasuryDirect—no broker needed, all electronic. It’s safe, backed by the government, so rates are lower than corporate bonds.
The Cost of Debt
The interest rate is a cost to the issuer and return to you. It reflects default risk and market rates, used in WACC calculations. Estimate it via yield-to-maturity or credit ratings from agencies like Moody's, adding a spread over Treasuries.
Issuing debt also involves fees: legal, underwriting, registration, paid to representatives, institutions, auditors, and regulators.
Frequently Asked Questions
Why do companies issue debt? They raise capital from investors without diluting ownership or giving voting rights. It’s often cheaper than equity, with tax advantages on interest.
What’s the cost? Beyond underwriter fees, it’s the coupon rate—the cash paid to bondholders until maturity. Higher yields mean higher costs.
What are the risks? Too much debt can lead to inability to pay interest or principal, causing default, bankruptcy, and worse credit ratings, making future debt costlier.
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