(Corrects name of company to Build America Mutual in last
By Jennifer Hoyt Cummings
NEW YORK, Aug 2 While U.S. municipal bond
investors wait to see how Detroit's bankruptcy filing plays out,
advisers should be calming them while taking a hard look at
Some prognosticators say that if the bankruptcy court treats
Detroit kindly by allowing it to shed a lot of its liabilities,
other troubled cities will follow its lead.
Others disagree, saying Detroit's Chapter 9 bankruptcy,
filed on July 18, may drag on for years and lead other cities to
think such a move is not worth the trouble.
"This will be precedent-setting for the municipal bond
market," said David Kudla, chief executive officer of Mainstay
Capital Management LLC, which is based 60 miles outside of
While things are in limbo, many investors are taking their
money out of U.S. municipal bond funds. They withdrew $2.24
billion in the week ended on Wednesday, extending the funds'
outflow streak to 10 weeks, according to Lipper, a Thomson
These skittish investors may be acting prematurely, many
municipal bond experts say, so it is up to advisers to give
clients perspective while also reviewing their holdings to make
sure there will not be any surprises.
"Now is the time for the adviser to earn their fee," said
Gene Goldman, vice president of research for the El Segundo,
California-based financial services company Cetera Financial
PEACE OF MIND
Remind clients that municipal bonds have very low default
rates. A May report by Moody's showed that the average 10-year
default rate on municipal bonds was 0.12 percent, compared with
11.8 percent on corporate bonds. And of the 7,500 municipalities
with bonds rated by Moody's, fewer than 40 are below investment
Overall state tax collections are still weak, but they had
risen for 13 consecutive quarters through the end of March,
according to The Nelson A. Rockefeller Institute of Government.
Housing prices are also on the rise, a boon for property taxes.
John Dillon, chief municipal bond strategist for Morgan
Stanley Wealth Management, said that while yields had
risen on longer-term munis, he saw compelling opportunities in
the five-to-11-year range.
"While certainly Detroit is the 800-pound gorilla in the
room," Dillon said, "the state of municipal credit has actually
Advisers who place clients in individual munis should be
doing comprehensive due diligence as a matter of course. And
advisers who place clients in bond funds should become more of a
watchdog over the managers of those portfolios.
Start by reviewing the holdings of the fund online or in the
annual reports and prospectuses. Make sure there is a good mix
of municipal bonds by geography, maturity dates and sector.
Consider each bond's type. It may be a revenue bond, backed
by a specific project, or a general obligation bond, guaranteed
by tax revenues and generally seen as the safest muni bet.
Figure out if a fund is overweight in an area by comparing
the holdings with that fund's benchmark, which in some cases may
be the Barclays Municipal Bond Index.
Go to the fund's own website and see the latest market
commentary from the managers. Many big firms have quarterly
conference calls, so hop on them and grill the managers about
Cetera's Goldman suggests a good question for them: What is
your least favorite holding, and why do you own it?
Get familiar with their research methodology. Goldman
recommends using a firm whose analysts go to city hall to get
financial statements and study traffic patterns before investing
in a bond used to finance the construction of a bridge or
If the fund manager does not have time to answer all your
questions, talk to your wholesaler, suggests Alan Dalewitz,
senior vice president with Fairfield, Connecticut-based Herbert
J. Sims & Co, an underwriter of tax-exempt bonds.
It may sometimes seem like a good idea to buy only insured
bonds, but they may be tough to find. In the first half of this
year, just over 3 percent of newly issued municipal bonds were
insured, down from 57 percent in 2005, according to Thomson
Check to see if the fund has insurance on bonds in high-risk
areas, such as Illinois, which has well-documented budget
problems, Dalewitz says. But then take that protection with a
grain of salt, because this insurance could not always be relied
upon in past crises.
Patrick Stoffel, municipal analyst with Wells Fargo
Advisors, said he would not generally recommend buying bonds in
a declining credit situation - like when there has been a
significant downgrade and no clear solution to the
municipality's problems, even if there is insurance.
The top-shelf credit ratings of several bond insurers were
slashed during the economic crisis because of their ventures
into mortgage-backed securities in the years leading up to 2007.
This dried up the supply of bond insurance.
But there are signs that the market is opening up again,
with new players venturing into the market, like Municipal
Assurance Corp, an Assured Guaranty Ltd unit that only
insures muni bonds, and Build America Mutual.
(Reporting by Jennifer Hoyt Cummings; Editing by Linda Stern
and Lisa Von Ahn)