Debt Issuance

Debt issuance is a form of financing that consists of the issuance of financial securitiesthat promise a future payment in exchange for a price, that is, it is to borrow money by issuing financial securities in the form of debt.

The main objective is to place the debt among investors offering a return on the holding of these securities. Debt issues are an important source of financing for both companies at the private level and for states at the public level.

Financial institutions, companies or states that place this debt seek financing to be able to meet their payments and their investment projects.

  • In the case of a state, what it will seek will be to deal with the maintenance of its social welfare system, which includes everything from payments to suppliers of all kinds of services to investments in order to improve public services for the common good.
  • On the other hand, a company will seek to place debt to meet its most immediate payment commitments and to make strategic investments that allow it to continue with its main activity.

There are different  types of debt , with different terms or maturities, yields,  coupons , issues on the nominal value,  at par  or below the nominal value.

An investor may acquire debt through a financial intermediary by accessing auctions, through the opening of accounts in the Central Bank of each country or by buying the debt through financial entities or  brokers , which allow the purchase and sale of the titles immediately charging for it a commission.

It is important to keep in mind that the investor will have a cash or transactional account and a securities account where the securities will be deposited.

Trading markets

It is important to mention that investors may acquire  public debt  or  private debt.  The debt placement market is known as the primary market, on the other hand, the trading market where the debt is quoted is called the secondary market and is quoted on a 100 basis. An example of a secondary market and its operation can be seen  here.

Therefore, the existence of a primary market is essential for a market to be efficient. In Europe, the business financing model is based on 17% in the issuance of debt and 66% in the application for bank loans, unlike the US, where the financing model through debt issuance represents 76% and the bank loan 12%.

Therefore, in the US companies are financed through their own resource management and debt issues, so we can say that their fixed income markets are more developed and more internationalized, unlike in Europe. That is why Europe has to tend towards a capital market integration model that allows the integration, transparency and accessibility of its investors to the debt markets of all the countries of the Union.

While it is true that there are criticisms of this model, since the role of banks in granting loans can be reduced, it is no less true that the banks themselves can issue debt and finance themselves, alleviating some of the risks incurred when granting bank loans, and in this way, avoid the risk of contagion between them.

It is important to mention that each type of debt has a credit rating based on the solvency of its issuer, and it is the  credit rating or rating agencies  that value the issuance of the debt securities, being Fitch, Standard & Poor’s and Moody’s the most recognized worldwide.

by Abdullah Sam
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