What is an obligor?
The term obligor refers to a person or entity, which has assumed or undertaken certain duties or obligation to another party, through legal contract. Therefore, it is a person or entity bound by contractual obligations.
Obligor is a legal term, which applies to several instances, depending on the nature of the contract that dictates the obligor’s obligations.
Failing to fulfill contractual obligations can cause reputational damage, whether the obligor is a person, or a private or a public entity/company. Reputational damage can include a decreased credit score.
What are examples of an obligor?
In a financial contract, such as a sale of a property or a loan given out for the purchase of a property, the obligor is the party that is contractually obligated to provide a benefit or payment -that is the buyer of the property, or the debtor in the case of the loan, respectively. The term applies to a person, as well as an entity – holders of corporate debt are also obligors.
A company that issues bonds is an obligor to its bondholders. Generally, the company must provide bondholders with set interest at specific times, or convert debt into equity in the case of certain occurrences, depending on the terms of the contract between the company and the bondholders (the obligees).
The original bond issue will include what is called covenants. These can be affirmative (they dictate the obligation to do something) or negative (they outline the restriction from doing something). A breach would be if the obligor fails to meet an affirmative covenant or if the obligor fails to comply with the restrictions of a negative covenant.
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