Are state government backed bonds really safe?

[Sarthak_Saraf]

Most people think these bonds are safe since they are backed by the state but one needs to understand that there is a thin line between these bonds.
Sovereign bonds usually consider
1) Government securities which are issued by the RBI on behalf of the central government.
2) State Development Loans which are issued by the state government to raise funds for development. It allows people to invest in the particular development of a state.
These bonds are backed by the sovereign so chances of default are less than 1 % .
Yield on many of these bonds range from 7 to 7.5%
However state guaranteed bonds are not backed by sovereign directly.
Many of these bonds have yields which are far higher than the market rates. For example, UP Power Corporation Bonds of 2025 maturity are trading at 10-11%, while Andhra Pradesh Capital region development Bonds with 2025 maturity are being offered at 9%.
These bonds seem attractive to many people since they are high yielding and are seen as state backed. Every time a bond offers you a high interest you need to research it deeply. There is a reason these bonds offer high interest rates and it is due to their weak balance sheet.
In 2019 the rating of Bengaluru Metropolitan Transport Corp. (BMTC), a state government PSU, was downgraded by ICRA to D (default) on account of delays and irregularities of payment. Though BMTC only had bank facilities it still affects their borrowing power.
Taking examples of another state guaranteed bonds like

1. Andhra Pradesh capital region development authority bond, the bond currently offers a yield of 10.8% much higher than bank FD’S and even some mutual funds. However the state has a weak economic structure with secondary sector contributing less than the primary sector . GST collection was impacted which reduced its ability to service interest obligations thereby requiring a loan of 3200 crores by the Government of Andhra Pradesh.
2. Uttar Pradesh Power Corporation Limited Although the bond seems to be better than the Andhra Pradesh capital region development authority bond it still has its own disadvantages. The most prominent one being the low per capita income in Uttar Pradesh. Not meeting targets set by the corporation. Increase in debt guarantee from 42 to 48%. These bonds however put as high as 20 crore in an escrow account daily to service these debts. Also the new Atmanirbhar Bharat scheme provides them with significant packages which increases its liquidity.

It is important to track the credit rating of these bonds as they provide valuable information about the liquidity of these bonds.
link to the article
https://open.substack.com/pub/cashf...lly?r=2kmfiq&utm_campaign=post&utm_medium=web

 

[Mani_Mahajan03]

State government-backed bonds are generally considered relatively safe investments. These bonds are backed by the government's ability to raise taxes and generate revenue, which adds a level of security. However, it's important to note that no investment is entirely risk-free. Factors such as economic conditions, financial management of the state, and credit ratings can affect the safety and performance of these bonds. It's always a good idea to research the specific state's financial health and consult with a financial advisor to assess the level of risk before investing in state government-backed bonds.

 

[Moksh Kumar]

I haven't invested in Bonds yet but I think it's quite safe.

 

[kagura]

Most people think these bonds are safe since they are backed by the state but one needs to understand that there is a thin line between these bonds.
Sovereign bonds usually consider
1) Government securities which are issued by the RBI on behalf of the central government.
2) State Development Loans which are issued by the state government to raise funds for development. It allows people to invest in the particular development of a state.
These bonds are backed by the sovereign so chances of default are less than 1 % .
Yield on many of these bonds range from 7 to 7.5%
However state guaranteed bonds are not backed by sovereign directly.
Many of these bonds have yields which are far higher than the market rates. For example, UP Power Corporation Bonds of 2025 maturity are trading at 10-11%, while Andhra Pradesh Capital region development Bonds with 2025 maturity are being offered at 9%.
These bonds seem attractive to many people since they are high yielding and are seen as state backed. Every time a bond offers you a high interest you need to research it deeply. There is a reason these bonds offer high interest rates and it is due to their weak balance sheet.
In 2019 the rating of Bengaluru Metropolitan Transport Corp. (BMTC), a state government PSU, was downgraded by ICRA to D (default) on account of delays and irregularities of payment. Though BMTC only had bank facilities it still affects their borrowing power.
Taking examples of another state guaranteed bonds like

1. Andhra Pradesh capital region development authority bond, the bond currently offers a yield of 10.8% much higher than bank FD’S and even some mutual funds. However the state has a weak economic structure with secondary sector contributing less than the primary sector . GST collection was impacted which reduced its ability to service interest obligations thereby requiring a loan of 3200 crores by the Government of Andhra Pradesh.
2. Uttar Pradesh Power Corporation Limited Although the bond seems to be better than the Andhra Pradesh capital region development authority bond it still has its own disadvantages. The most prominent one being the low per capita income in Uttar Pradesh. Not meeting targets set by the corporation. Increase in debt guarantee from 42 to 48%. These bonds however put as high as 20 crore in an escrow account daily to service these debts. Also the new Atmanirbhar Bharat scheme provides them with significant packages which increases its liquidity.

It is important to track the credit rating of these bonds as they provide valuable information about the liquidity of these bonds.
link to the article
https://open.substack.com/pub/cashf...lly?r=2kmfiq&utm_campaign=post&utm_medium=web

s.

While sovereign bonds are considered relatively safer due to their backing by the central government, state guaranteed bonds can carry higher risks. The higher yields might seem attractive, but it's crucial to research deeply and consider the underlying financial health of the state issuing the bonds. Weak economic structures and payment irregularities can impact a state's ability to service its debt obligations.
The credit rating of these bonds is a valuable indicator to track, as it provides insights into their liquidity and creditworthiness. Always conduct due diligence and carefully weigh the risks before investing in state guaranteed bonds. Diversifying investments and seeking professional advice can help mitigate potential risks and ensure a well-balanced investment strategy. Thanks for sharing this important information!