What is an 'Obligor'

An obligor, also known as a debtor, is a person or entity who is legally or contractually obliged to provide a benefit or payment to another. In a financial context, the term "obligor" refers to a bond issuer who is contractually bound to make all principal repayments and interest payments on outstanding debt. The recipient of the benefit or payment is known as the obligee.

BREAKING DOWN 'Obligor'

An obligor is a person who is legally bound to another. Debt holders are the most common types of obligors. However, in addition to the required repayment of interest and principal, many holders of corporate debt are also contractually required to meet other requirements. For a bond holder, these are called covenants and are outlined in the initial bond issue between the obligor and obligee.

Obligor in a Corporate Setting

Covenants can be either affirmative or negative. An affirmative covenant is something that the obligor is required to do, such as the need to hit specific performance benchmarks. A negative covenant is restrictive in that it stops the obligor from doing something, such as restructuring the leadership of the organization. If a covenant is breached by an obligor, the bond may become invalid and require immediate repayment, or it can sometimes be converted to equity ownership.

Since these bond issues are contractual obligations, obligors have very little leeway in terms of deferring principal repayments, interest payments or circumventing covenants. Any delay in payment or non-payment of interest could be interpreted as a default for the bond issuer, an event that can have massive repercussions and long-term ramifications for the continuing viability of the business. As a result, most bond obligors take their debt obligations very seriously. Defaults by overleveraged obligors do occur from time to time.

Obligor in a Personal Setting

An obligor is not required to be a bond holder or a holder of some other form of debt. Someone can become an obligor in his personal life, too. In family law, there are certain cases when a court order is handed down – in a divorce settlement, for example – that requires one of the parents to pay child support to the other parent. If a working spouse is told by the courts to pay the non-working spouse $500 a month, the monthly payment would make him an obligor. In situations like this, if the there are changes to an obligor's financial status or income, he may petition the court to reduce his monthly obligation.

RELATED TERMS
  1. Ba1/BB+

    Ba1/BB+ is a rating designation by Moody's Investor Service and ...
  2. Bond Covenant

    A bond covenant is a legally binding term of an agreement between ...
  3. Negative Covenant

    A negative covenant is a bond covenant preventing certain activities, ...
  4. Notching

    Notching is the practice by rating agencies to give different ...
  5. Debt Limitation

    Debt limitation is a bond covenant that limits additional debt ...
  6. Bond Violation

    A bond violation is a breach of the terms of a surety agreement ...
Related Articles
  1. Investing

    Corporate Bonds and the Importance of Covenants

    Any type of investor, private or institutional, should be acquainted with the significance of covenants in corporate bond agreements.
  2. Insights

    Could Saudi Arabia Really Go Bankrupt?

    The IMF warned that Saudi Arabia may run out of the financial assets needed to support spending within five years. Is Saudi Arabia's government doing enough?
  3. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  4. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  5. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  6. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  7. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
RELATED FAQS
  1. Are high-yield bonds better investments than low-yield bonds?

    It depends on the amount of default risk you as an investor want to be exposed to. More yield goes hand-in-hand with more ... Read Answer >>
  2. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center