State Government Guaranteed Bonds are safe & senior bonds offering a higher coupon rates.
If you have landed on this page, you must be exploring the options to make safe investments. You are in the right place. This blog reads about State Government Guaranteed Bonds that are safe and senior bonds.
Before discussing State Government Guaranteed Bonds let’s know what are Guaranteed Bonds. Guaranteed bonds are the bonds that guarantee repayment of principal amount and interest if the issuer defaults. A separate entity with a stronger credit history will act as a guarantor when the issuer has lower creditworthiness. This helps the issuer to raise capital and provides security to the investors.
State-Owned Enterprises(SOE) are legally formed by the state government to perform commercial activities. Examples SOE are for Oil and Natural Gas Corporation (ONGC), UP Power, etc. State-Owned Enterprises issue bonds to raise capital. If these enterprises are found with lower creditworthiness, then the State Government guarantees the bonds issued by State-Owned Enterprises. And these bonds are called State Government Guaranteed Bonds.
Generally, the guarantor collects fees from the issuer for guaranteeing the bonds; hence Guaranteed Bonds pay less interest than the non-guaranteed bonds. In the case of State Guaranteed Bonds, the state government doesn’t collect any fees for guaranteeing the bonds issued by state-owned enterprises. Hence State Government Guaranteed Bonds pay on par with non-guaranteed bonds though they are relatively safer than non-guaranteed bonds. In nutshell, State Government Guaranteed Bonds are safer and offer higher coupon rates than their counterparts.
Benefits of investing in State Government Guaranteed Bonds
There are several benefits in investing in State Government Guaranteed Bonds for both the issuer and the investors. Here are a few.
- Despite having lower creditworthiness, the issuer can raise capital via issuing State Government Guaranteed Bonds.
- As State governments do not collect the fee for guaranteeing the bonds hence borrowing cost reduces significantly.
For the investor:
- In the case of the State Government, Guaranteed Bonds state government will pay the interest and principal amount if the issuer defaults. This gives an extra layer of security to investors.
- Most of the time, the State Government Guaranteed Bonds pay higher coupon rates than their counterparts.
- State Government Guaranteed Bonds are considered as senior debt securities as the guarantee given by the State Government is unconditional and irrevocable. However, investors are advised to always refer to the information memorandum of any such bond to make sure that the state has put in its ‘unconditional and irrevocable guarantee’ in writing.
- A state-owned enterprise going bankrupt is very rare; nevertheless, if the issuer goes bankrupt, then bondholders of State Government Guaranteed Bonds are paid before the owners of non-guaranteed debts.
- The State Government Guaranteed Bonds are always in demand; hence liquidity of these bonds is very high. Investors can buy or sell these bonds with ease.
- These bonds pay coupons quarterly or biannually, helping investors with regular and frequent cashflows.
- Most State Government Guaranteed Bonds have staggered maturity. This means that on maturity, 25% of the face value is paid back to the investor per quarter over the entire year along with the outstanding interest payments.
Examples for State Government Guaranteed Bonds
Here is the list of bonds issued by different State-Owned Enterprises where their respective governments act as guarantors. Refer to the table below.
Who can invest?
- People looking for regular and fixed income can invest and support their families. Since the state government secures these bonds, these are suitable for senior citizens as well.
- Foreign institutional investors can also buy State Government Guaranteed Bonds.
- NRIs can not buy these bonds.
How to Invest State Government Guaranteed Bonds?
In GoldenPi , we have curated high performing State guaranteed bonds to make bond selection easy for you. You can buy State Government Guaranteed Bonds in IPO (Initial Public Offering) or the secondary market.
Investors can purchase bonds in three simple steps. To know more, click here.
State Government Guaranteed Bonds come with
the irrevocable and unconditional guarantee from State Governments,
making your investments safe and secured.
Note: Please refer to the information memorandum of any State Government Guaranteed Bond to check this clause and do your due diligence before investing.