A growing number of U.S. cities are choosing to fund essential services like public safety and garbage collection over making payments on their outstanding debt, as rising costs and falling revenue deplete their budgets.
So far, the bond defaults are not roiling the
"Municipalities are saying this is what bond insurance is for – bond holders get paid," said
So far in 2012, there have been 21 muni defaults totaling
Although issuers contend they are not singling out insured munis for defaults, some believe that municipalities are strategically protecting bond buyers by relying on insurers to pay the debt service.
"Such a default may signal changing attitudes by distressed municipalities to contemplate a strategic default or bankruptcy on insured debt, knowing that bond holders will not suffer losses,"
The credit rating agency added that municipal issuers "may be willing to damage their relationship" with insurers, which in turn could potentially be exposed to large losses.
CITY SERVICES TRUMP BOND-HOLDERS
"I was aware they were insured bonds when we made the decision,"
"My first concern as receiver is to maintain vital and necessary service in the city," he said. "In order to do that I need sufficient cash flows."
The city of
Some of the companies are starting to feel the pressure.
In addition, the once-widespread use of insurance on new issuance has shrunk to a sliver of the muni market. After the financial crisis, so-called monoline insurers left the business, and the largest remaining insurer,
Insured bonds, which accounted for 57.3 percent of muni issuance in 2005, sank to only 5.5 percent of issuance in 2011, according to
Insurers do not appear to perceive an immediate risk.
"We don't feel picked on," said a senior executive at a bond insurer. "I'm not sure it's correct to say issuers are deciding to default on insured bonds over uninsured ones. The market does not care whether a bond's insured or not. The fact they defaulted is what the market remembers."
The executive, who spoke on condition of anonymity, said struggling issuers get no tangible benefit from skipping payments on an insured obligation over an uninsured one since any money must eventually be repaid to the insurer.
"It's not a get-out-of-jail card," the executive said.
THE FINANCIAL CRISIS LEGACY
There was a time when bond insurers confined themselves to the dull but steady business of underwriting municipal debt, effectively lending their superior credit ratings to cities and towns for a fee.
The insurers branched out into structured financial products, which resulted in huge payouts when the credit crisis hit.
One-time market leader
The carnage left one bond insurer standing,
"This is weighing more heavily in our underwriting as we examine the legal framework for bankruptcy in every state that we insure municipal securities," Assured said in a written reply to Reuters. "While some defaults have occurred on insured transactions, most have been on uninsured transactions."
As of the end of 2011,
Assured listed exposure to
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