Municipal bond defaults in early 2012 were up dramatically — or down dramatically — depending on how you look at the data.
Distressed Debt Securities Newsletter has collected data through
In the same period in 2011 there were 10 defaults totaling
The discrepancy carries over to their annual default numbers.
Where the newsletter found that defaults went up 401.6% in 2011 compared to 2010 to
The explanation for the difference turns out to be relatively straightforward: The organizations use different definitions for what constitutes a default.
The newsletter says there is a default anytime a municipal issuer invades its debt-service reserve fund or there is a declared bankruptcy, said newsletter editor
A debt-service reserve requirement is “a legally binding covenant of a obligor to maintain a specific available liquid reserve to meet debt service requirements in the event pledged revenues are insufficient,” according to the Handbook of Municipal Bonds.
Defaults are “issuer-specific” events and not “bondholder-specific” events, said the newsletter’s publisher,
The Standard & Poor’s group compiles statistics on what it calls technical defaults — a violation of covenants or use of reserves — as well as monetary defaults — when a borrower misses a payment to bondholders.
However, S&P primarily publicizes the monetary defaults. Only if a bondholder does not get paid or doesn’t get paid on time does Standard & Poor’s declare a monetary default. If an issuer fails to make an interest payment, the S&P group considers the entire bond issue’s par value to be in default.
S&P attempts to track the entire municipal bond market.
About 0.5% of all municipal bonds are currently in monetary default, measured by par value, according to Standard & Poor’s fixed-income group.
The group gets this information, unlike the default information, from the S&P Municipal Bond Index.
The index tracks over
The index includes both rated and unrated bonds.
Asked about the divergence in trends between the S&P and newsletter default measures, two analysts pointed to so-called tobacco bonds, some of which drew down reserves last year to make debt service payments.
Ciccarone also said the bankruptcy filing by
S&P Capital IQ has counted only
The defaults defined by debt-service reserve draws may foreshadow future monetary defaults, according to Ciccarone.
Schankel noted that only a few million dollars was drawn from reserves to make payments on the tobacco bonds — bonds backed by revenues provided by the Master Settlement Agreement between various municipalities and the major tobacco companies.
These draws will probably be cured in the next few months, Schankel said. However, the February issue of Distressed Debt Securities Newsletter predicts that the invasion of debt reserves for tobacco bonds will prove to be just the first step to more serious defaults.
The three main rating agencies also put out year-in-review reports about defaults. Standard & Poor’s Ratings Services annually generates year-in-review reports that are separate from the reports that Standard & Poor’s Indices issues over the course of a year based on figures from S&P Capital IQ and the S&P Municipal Bond Index.
The rating agencies’ reports disclose and examine defaults in the previous year by issuers and bond issues that the agencies currently rate.
S&P reported that six bond issues it rates defaulted in 2011. Moody’s had four defaults, and Fitch had one.
The ratings agency reports do not specify par value.
Fitch downgraded the one Fitch issuer that defaulted in 2011 to BB from BB-plus on
Fitch defines a default as either a failure to make a promised payment, a bankruptcy or a “distressed debt exchange of an obligation, where creditors were offered securities with diminished structural or economic terms compared with existing obligations.”
Moody’s uses similar conditions to declare a muni bond in default. S&P says defaults occur when bondholders do not receive money that has been promised to them.
Muni investors have paid increased attention to muni defaults in recent years as the economic downturn put intense stress of state and local government finances.
Until recently such defaults were rare and generally only affected smaller issuers. In the last few years high-profile government issuers like
Most of Stockton’s bonds are insured. Because the one bond not insured on
“One thing these figures show is that the days when we have a zero-loss market are gone,” Ciccarone said.
Robert Slavin writes for The Bond Buyer.
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