Sub-Sovereign Obligation (SSO)

What Is a Sub-Sovereign Obligation (SSO)?

A sub-sovereign obligation (SSO) is a form of debt obligation issued by hierarchical tiers below the ultimate overseeing body of a nation, country, or domain. This form of debt comes from bond issues made by states, areas, urban communities, or towns to fund municipal and nearby projects.

A municipal bond is a common illustration of a SSO.

Grasping Sub-Sovereign Obligations

A sub-sovereign obligation is a form of debt obligation commonly made by municipalities to meet funding requirements. Investors or the higher government authority of a country might purchase municipal bonds issued by these sub-sovereign elements. The issuers are committed to pay interest periodically on the bonds until the securities mature, at which point the principal amount of investment is reimbursed.

Municipal bonds, or "munis", are frequently exempt from federal taxes and most state and nearby taxes for qualified investors, making them especially attractive to individuals in top level salary tax brackets.

Sub-sovereign obligations are issued to raise capital to finance a project that would enhance a region or community after completion. Interest payment on the obligation can be funded from the revenue that will be generated from the project or from the revenue account of the municipal issuer. Giving bodies are responsible for their own debt issues, which can carry huge risk contingent upon the financial wellbeing of the municipality.

Rating agencies assess the risk of default of every issuer and rate the bonds appropriately. In any case, given that these bonds are backed by a small governmental body, the risk of default is lower than that of corporate bonds. Thus, municipal bonds are typically issued with lower yields than corporate bonds.

While some sub-sovereign debt obligations are taxable, others are not. A tax-exempt bond is issued to fund a project that straightforwardly impacts the community decidedly. Interest earned on these bonds isn't subject to tax at the federal level. An investor has an additional tax-exemption benefit at the state or neighborhood level assuming they live in the state of issue. Sub-sovereign obligations are taxable in the event that the project for which the proceeds of the bond finances have no undeniable public benefits.

Most taxable sub-sovereign obligations are issued to finance the deficits of state and nearby pension funds. Different circumstances in which taxable sub-sovereign debt might be issued incorporate financing nearby games facilities, financing investor-drove housing, or refinancing debt. Build America Bonds (BABs) are an illustration of taxable bonds; they were made under the American Recovery and Reinvestment Act (ARRA) of 2009 and, albeit taxable, have special tax credits and federal subsidies for the bond issuer and holder.

SSOs and Call Risk

Investors who purchase debt issued by a sub-sovereign body are presented to call risk. The municipal debt obligations are callable, and that means that an issuer that desires to refinance its outstanding debt with a lower interest rate, looks for a better payment schedule, or needs a better debt covenant, can recover the bonds prior to maturity. When a bond is retired from the market on a call date, the bondholder stops getting interest payments.

A debtholder confronted with the risk that their bond could be called likewise faces reinvestment risk. In an economy with declining interest rates, an issuer might jump all over the chance to buy back its existing bonds and reissue the bonds at a lower interest rate. By buying its bonds back, investors might have no real option except to reinvest their proceeds into comparable debt offerings with lower interest payments.

Features

• Governments raise revenue through bond issuance to pay for progressing operations like overhead and public employee salaries, or to fund infrastructure projects or other public works.
• A sub-sovereign obligation (SSO) is a type of bond issued by a government however below the federal or national level.
• Municipal bonds are an illustration of state and neighborhood level SSOs, and may give certain tax breaks to certain investors.