Types of Debt Security Issuers

Why Issuer Type Matters

When you buy a debt security, you're relying on the issuer's ability and willingness to pay. The legal structure of the issuer determines: • What assets back your claim • What happens in bankruptcy • How creditworthy the promise really is The same underlying investment can have very different risk profiles depending on who issues the security.

Issuer Types at a Glance

German Issuer Types

Most debt securities you'll encounter are issued by entities incorporated under German law. Understanding these legal forms helps you assess credit risk and know your rights as a creditor.

1. Bank Issuers (Aktiengesellschaft)

The most common issuer for retail products in Germany. When Deutsche Bank AG or Commerzbank AG issues a certificate (Zertifikat), you hold a direct claim against the bank. The bank's entire balance sheet stands behind the obligation. German banks are incorporated as Aktiengesellschaft (AG)—stock corporations with minimum €50,000 share capital. Major banks have balance sheets exceeding €1 trillion.

Bank Issuer Characteristics

• Full recourse – Your claim is against the entire banking entity
• Heavy regulation – Subject to CRR/CRD capital rules, BaFin supervision
• Deposit guarantee does NOT cover certificates – Only deposits up to €100,000
• Credit risk = bank's overall creditworthiness (typically A to BBB rated)
• Resolution regime – EU BRRD applies; bail-in possible for certain instruments

Bank Guarantee Structures

• Direct issuance: Bank itself is the issuer (most common in Germany)
• Guaranteed issuance: Subsidiary issues, parent bank guarantees
• The guarantee makes the parent's credit rating relevant
• Read the term sheet: "Garantin" or "Guarantor" section reveals who ultimately pays

2. Large Corporate Issuers (EMTN Programmes)

Major corporations issue bonds through Euro Medium Term Note (EMTN) programmes. Companies like Siemens AG, BMW AG, or BASF SE maintain standing programmes allowing them to issue notes quickly without new prospectus approval each time. These issuers are typically incorporated as AG (Aktiengesellschaft) or SE (Societas Europaea—European Company).

EMTN Programme Features

• Base Prospectus filed with regulator (often Luxembourg or Ireland)
• Final Terms for each specific issuance
• Rated by major agencies (Moody's, S&P, Fitch)
• Issue sizes from €100M to €1B+
• Full recourse – Claim against the entire corporate entity
• Transparency – Audited financials, regular reporting
• Minimum denomination – Often €100,000 (institutional focus)

3. SME Issuers (Mittelstand)

Germany's famous Mittelstand—mid-sized companies—also access bond markets. These issuers use various German legal forms depending on their size and structure:

German SME Legal Forms

Mittelstand Bonds (Mittelstandsanleihen)

German SMEs have issued bonds directly to retail investors, particularly during the 2010-2015 period. These "Mittelstandsanleihen" offer higher yields but carry significant risks: • Often unrated or rated by smaller agencies (Creditreform, Euler Hermes) • Limited financial disclosure compared to large corporates • Concentration risk – business often depends on few customers/products • Historically high default rates – several prominent failures (Prokon, German Pellets, KTG Agrar)

4. Project Finance Issuers

Single-purpose vehicles for infrastructure and renewable energy projects. Project SPVs are typically incorporated as GmbH (limited liability company) and issue bonds backed solely by project cash flows. The parent company (sponsor) usually has no liability beyond its equity investment.

Project Finance Bond Characteristics

• Single-asset backing – Revenue from one project (solar park, wind farm, real estate)
• Cash flow dependent – Repayment tied to project performance
• Senior secured – Often first claim on project assets
• Limited recourse to sponsor – Parent company usually not liable
• Ring-fenced structure – Project assets isolated from sponsor's other businesses
• Example: "Windpark Nordsee GmbH 5.5% 2030" – backed only by that wind farm's revenues

Reading the Prospectus: Key Sections

Always check these sections to understand issuer risk: "Emittentin" (Issuer) – Legal name, jurisdiction, company form (AG, GmbH, SE) "Garantie" (Guarantee) – Is there a parent guarantee? By whom? "Rang" (Ranking) – Senior, subordinated, or junior claims? "Risikofaktoren" (Risk Factors) – Issuer-specific risks, business dependencies "Mittelverwendung" (Use of Proceeds) – What will they do with your money?

Excursion: Luxembourg Securitisation SPVs

Beyond German issuers, you'll frequently encounter Luxembourg SPVs in structured products. A Société Anonyme (S.A.) set up under Luxembourg's 2004 Securitisation Law exists solely to issue securities. These vehicles are extremely popular with international banks for structured products, securitisations, and repackaging transactions. Why Luxembourg? The jurisdiction offers: • Compartmentalisation – Legal separation of different issuances • Tax efficiency – Favourable treatment for pass-through vehicles • Flexibility – Quick setup, minimal capital requirements • EU passport – Securities can be sold across Europe

Compartmentalisation: The Key Feature

Luxembourg law allows a single SPV to create legally separated compartments (Compartiments). Each compartment operates as if it were a completely separate company: • Each compartment has its own assets, liabilities, and investors • Creditors of Compartment A have absolutely no claim on assets of Compartment B • One SPV can issue thousands of different products, each in its own isolated compartment • If one compartment becomes insolvent, others continue unaffected Example issuer name: "XYZ Issuance S.A., acting in respect of its Compartment 2847"

Limited Recourse: The Critical Concept

This is the most important concept to understand with SPV issuances. When you invest in a compartmentalised SPV note, you have limited recourse. This means: • Your claim is strictly limited to the assets held in that specific compartment • If compartment assets are insufficient, you receive less than promised—possibly nothing • You cannot claim against the SPV's other compartments • You cannot claim against the sponsoring bank that arranged the product • You cannot claim against shareholders or directors of the SPV The prospectus will state: *"The Noteholders' recourse is limited solely to the assets of the relevant Compartment. In the event of a shortfall, Noteholders will have no further claim against the Issuer or any other person."*

What Backs Your Compartment?

• Collateral assets: Bonds, equities, or other securities pledged to the compartment
• Swap agreements: Derivatives contracts with a bank (swap counterparty)
• Cash deposits: Held in segregated accounts
• Insurance or guarantees: Sometimes credit enhancement from third parties
• Nothing but promises: In worst cases, just contractual claims on the swap counterparty

Why Banks Use SPVs

Why would Deutsche Bank use an SPV instead of issuing directly? • Balance sheet efficiency: SPV liabilities don't appear on the bank's balance sheet • Regulatory capital: Avoids capital requirements for the bank • Risk transfer: The bank earns fees but doesn't bear the ultimate credit risk The result: You might buy a "Deutsche Bank" product that actually has no claim against Deutsche Bank. The bank arranged it, the bank's name is on the marketing—but if the SPV compartment fails, Deutsche Bank owes you nothing.

SPV Warning Signs in the Prospectus

• "Limited recourse" – You can only claim compartment assets
• "Non-petition" clause – You cannot force the SPV into bankruptcy
• "No rating" – Many SPV notes are unrated; you must assess quality yourself
• "Swap counterparty" – Your payoff depends on another bank honoring a swap agreement
• "Issuer is not regulated as a bank" – No deposit protection, no BaFin oversight

German Bank vs. Luxembourg SPV

Issuer Credit Risk Spectrum