Year 2011 may bring a new wave of defaults by municipal-bond issuers as federal stimulus aid declines and budget pressures jeopardize debt payments, said according to a Bloomberg article by Darrell Preston, “Muni Issuers May Face Default ‘Crunch,’ Lehmann Says.” The article cites the “Distressed Debt Securities Newsletter” by Richard Lehmann.
Many state and municipal governments have not dealt with budget shortfalls and some have borrowed to patch deficits. All this means that issuers may not make debt-service payments. “Next year may well be the crunch year,” Mr. Lehmann was quoted as saying, adding: “You may see a new wave of defaults.”
As of October of this year, defaults stemming from missed payments and other “technical” reasons, fell to $2.48 billion from $7.28 billion in 2009 and a record $8.15 billion in 2008, according to Mr. Lehmann’s data. Technical defaults occur when bond terms other than payment obligations are violated.
Missed payments on Main Street Natural Gas Bonds and Jefferson County, Alabama sewer bonds drove the default rate higher in 2008, according to Mr. Lehmann’s data.
From 1970 through 2009, investment-grade municipal debt had an average default rate of 0.03 percent, compared with 0.97 percent for corporate issues. Last year, however, the number of defaults rose, although many involved smaller issues.
The worst recession since the Great Depression has slashed tax revenues. In recent years, state and local governments received funds from federal economic stimulus programs but the stimulus spending will wind down next year.
In addition, state and local governments face swelling pension obligations, rising costs for health care and education, and political pressure to not raise taxes, according to Mr. Lehmann.
As a result, these governments bear financial burdens at “a level that has not been seen for decades” according to the article, citing Fitch Ratings. Default could “increase from exceedingly low historical levels,” a Fitch spokesman was quoted as saying.
Harrisburg, PA and Detroit have reportedly contemplated bankruptcy in the face of pending debt payments, sagging tax revenue and rising costs. The city of Vallejo actually filed for bankruptcy in 2008, becoming California’s biggest municipal bankruptcy since Orange County in 1994.
In addition to the increasing default risk, when interest rates rise, another crunch will be felt. The price of municipal bonds could fall by three points for every point rise in interest rates.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.