Underlying Debt

In instances where the debt of an issuer is implicitly or explicitly guaranteed by a third party, the portion of third-party debt guaranteed will be included under the total debt load of the guarantor as underlying debt. This can happen in the case of corporate debt (i.e. a group entity guaranteeing debt of a subsidiary) or in public finance, where, for example in the US, a state may include debt incurred by a small town or small utility as underlying debt. Some rating agencies assign credit ratings to underlying entities disregarding the level of third-party enhancements so that investors can assess the degree of underlying credit risk and the robustness of third-party credit support arrangements separately. In the UK, alternatively, the Office for Budget Responsibility calculates public debt including and excluding certain debt types. Gross public debt includes all debt incurred by the UK government. But the OBR also calculated public debt excluding the Bank of England’s term funding scheme, which lends to eligible financial institutions at rates very close to the bank rate to support the economy. Public debt excluding the term funding scheme is referred to as underlying debt