Credit Analysis for Government Issuers

This learning module explores special considerations for the credit evaluation of sovereign and other public issuers that often access fixed-income markets to finance their activities.

A major difference between corporate and sovereign issuers is the use of proceeds and source of repayment of debt obligations. In contrast to corporations that fund working capital and fixed assets to generate profits, sovereign and other government issuers use debt to conduct fiscal policy, supply public goods and services, and fund other government expenditures. While companies primarily rely on operating cash flow to repay debt, governments use tax revenues and other government revenues, such as tariffs and fees, to pay interest and principal.

We analyze sovereign bonds using a combination of qualitative and quantitative factors to assess their ability and willingness to pay. Sovereign defaults are not uncommon, particularly as countries transition from emerging to advanced economies. However, in contrast to corporate issuers, sovereign bondholders are generally unable to force governments to declare bankruptcy and liquidate assets. Non-sovereign issuers, such as certain local governments or quasi-government entities, also issue debt to finance their expenditures or develop infrastructure. This debt is backed by their ability to levy local taxes or generate specific project revenue.