The Bond Market

Explained

Companies seeking finance have two main routes: equity financing or debt financing. Equity financing requires giving up a percentage of ownership in the company (like selling shares). Debt financing requires eventually paying back the funds over an agreed period plus regular interest payments.

Companies pursuing debt financing have two main paths: a loan from a bank or other financial institution. Or issuing bonds.

Bonds are like an I-Owe-You that can be traded by investors (bondholders). They have an agreed time period (often 10 years) after which the bond has matured and the value is repaid to the bondholder. Over the course of that period regular interest payments are paid by the bond issuer to the bondholder. This is called the coupon (coupon rate = the interest rate of the debt).

Though larger than the global stock market, the bond market is far more opaque, with fewer checks and balances, and huge power vested in a small number of players.

As many banks start to limit their lending to carbon intensive industries, companies in the coal, oil and gas value chain are turning more to the bond market as a safe haven. By issuing bonds they can enjoy less public scrutiny, less transparency and ready access to trillions of dollars of debt.

Accessing this cheap debt relies upon a chain of financial institutions: investment banks, ratings agencies and investors. Here are some of the key players involved in facilitating the trillion dollar debt pipeline financing the climate crisis:

Bond Issuers

Bonds are issued by a company for general operations, to refinance other debt, or to fund capital intensive projects or acquisitions and companies have to pay periodic interests to the buyers while paying back the buyers in full within the maturity dates to avoid default.

Issuing bonds is attractive to fossil fuel companies because:

They can offer less scrutiny than direct project financing like bank loans

Companies can often borrow large sums of money at cheaper rates compared to loans

They don't involve handing over any control of the company to investors

The Toxic Bonds campaign exposes the lists of bonds issued by the worst of the worst companies to hold them accountable for destroying the environment.

Bookrunners, Arrangers or Underwriters

To issue a bond, a company needs a dealmaker. Often several.

Enter the banks.

Acting as a bookrunner (also known as an arranger or underwriter), banks advise companies issuing bonds and help take them to market the bonds.

As calls for climate action and sustainable finance are getting louder, many large banks have developed net zero and/or coal exclusion policies. But in some cases these policies apply only to the investment activities of the bank, not financial services like bookrunning.

Any bank supporting expansionist fossil fuel companies is driving climate chaos. The Toxic Bonds campaign asks that all banks urgently cease underwriting Toxic Bonds.

Credit ratings agencies

For a bond to be issued, the credit worthiness of the issuer needs to be rated. Just three agencies dominate this business - S&P, Moody’s and Fitch. They tell potential investors how risky a bond is. The lower they deem the risk, the cheaper and easier it becomes for companies to secure debt.

Though they claim these ratings are independent, they are paid handsomely by the very same companies they rate. Despite the obvious risks - both environmental and financial - from investing in fossil fuel projects, all three agencies stress that they will not downgrade the ratings of firms with strong balance sheets based on environmental, social and governance (ESG) issues alone. It’s unsurprising, given that fossil fuel companies make up a quarter of non-financial corporate bond ratings.

Investors or bondholders

The majority of bond holders are asset managers, pension funds and insurers. This shows that investors are using the public’s money – the money that we entrust them with – to fund the climate crisis. The Toxic Bonds campaign asks these bondholders to enact robust policies that exclude new investment in fossil fuel bonds and cover divestment from existing bond holdings, including passive holdings and third party assets.

Every player in the bond market has a role to play in addressing the climate crisis. Head to the Campaigns page to see which players are in the crosshairs.