Small unrated municipal bonds whose coupons are not backed by tax revenues (“mini munis”) are a class of troubled assets that are imbedded in some seemingly safe municipal bond funds, according to a SmartMoney article by Russell Pearlman entitled “The Growing Impact of ‘Mini Muni’ Bonds.” Thousands of them are missing payments and may impair the performance of municipal bond funds that hold them, according to the article.
Over the past two years, 231 unrated muni bonds with a cost basis of more than $5 billion have defaulted. While the number of defaults overall is still small in the vast bond universe, mini munis are four times more likely to default than rated bonds.
Not only are mini munis not backed by taxpayers, the projects that they fund are not the more essential government functions that rated bonds are issued to finance, such as roads and sewers. Mini munis finance projects like golf courses, museums, nursing homes, and charter schools that more often run into financial trouble.
A lack of disclosure is aggravating the problem, as some municipal bond issuers go years without reporting on the soundness of their finances, according to the article, citing DPC Data, a provider of data and services to the bond market. Forty percent of municipal bond issuers did not file required disclosures in 2009, and 20% have failed to do so for five years.
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