Hi all,
I am looking at state governement guarenteed bonds (U.P power corporation and AP state beverage). UP power Corporation Limited has A+ Crisil rating and AP state beverages bond has AA stable India rating.
What are the different consideration I need to look at while deciding to buy a governement guaranteed bond?
Thank you very much in advance
source:
crisil rating for UP power corporation: Rating Rationale
Is it safe to purchase a state governement guaranteed bond?
Purpose: I am considering to purchase and holding it until maturity.
So far, I have check the following,
i. secured bond (unconditional and irrevocable guarantee by the state government)
ii. coupon rate: I am ok with it
If you are going to hold it till maturity then Liquidity would not be an issue for you.
If possible buy bonds which are trading below their Face Value (Generally Rs. 100, 1000 or 1000000 per Unit), this affects your Yield to Maturity (YTM).
As far as SDLs are concerned they are safe and have following arrangement for servicing SDLs.
All SDLs are serviced by the RBI through two funds called the Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) that States maintain with the RBI. Even other than these funds, the RBI can dip into the cash flows from the Central to State Governments, if a State were to reach a state that servicing a SDL becomes a question mark. There is no instance of any default by an SDL in India, due to this mechanism.
But
To be noted, entities (e.g. companies) owned by a State government, issuing bonds guaranteed by the State government, are different from SDLs. There are instances of delay in those.
Hi @CrownedEagle,
Thanks for the detailed explanation.
Could I consider that credit risk low (or nil) for instruments such as GOI bonds, PSU bonds, SDL and central/state government gauranteed bonds?
For GOI bonds, PSU bonds, SDL bonds one can consider Credit Risk to be negligible.
This is true for any Rupee denominated Security issued by Govt of India.
But in absolute sense this is little bit complicated. NO ENTITY can declare itself to be Default Free… Not Indian Govt, US Govt or Switzerland etc. There is always small but finite risk of default. But if we think about it practically, Govt issued securities denominated in the local currency issued by that Govt could be considered as Default Free.
In reality, Globally speaking, govts prefer defaulting on their liabilities than printing more money and risking inflation in case of default. More or less this default risk is reflected in the Sovereign Credit Rating of the Country or in CDS Default Spreads.
So to sum up, when focusing on India alone, Indian Govt is most default free entity that one can find.
As mentioned above, bonds issued by entities (e.g. companies) owned by a State government & guaranteed by the State government could face delay in payments when financial situation of that entity deteriorates.
These are backed by state gov.
If bond is senior, secured and backed by state gov , There are less chances of default.
Even if they default, these bonds are senior and secured by company assets so you will most of your money back.
I have bought Andhra Pradesh Capital Region Development Authority bond in mid 2023 and I think that although they are safe as they have unrevocable garuntee, liquidity is a issue, especially those which are maturing at a later date. my advice please read latest credit report thoroughly and check NSDL Bond Directory with specific ISIN for any red flags in past.
You can use any Online Bond trading platform.
I personally used Indiabonds.
Please check the price and yields for your desired bonds on different platforms.
