April 14, 2011 / 10:27 PM / 9 years ago

Muni defaults fall, defying dire forecast

NEW YORK (Reuters) - Municipal bond defaults tumbled in the first quarter compared with a year ago, casting further doubt on a bold prediction that a wave of defaults would rock the $2.9 trillion U.S. municipal bond market in 2011.

Only nine issues defaulted in the quarter, down 59 percent from the 2010 period.

Late last year Wall Street analyst Meredith Whitney — who made her reputation by predicting in 2007 that Citigroup would need a massive capital infusion — spooked individual investors when she predicted 50 to 100 “sizable defaults” by local governments amounting to hundreds of billions of dollars.

Whitney’s remarks came at a time when the market was already roiled by a collapse in state and local revenues due to the recession and financial crisis. Many states, cities and counties had to raise taxes, slash spending and turn to the federal government for help.

With the economy strengthening, first-quarter muni defaults in the first three months of 2011 totaled $245 million, down from more than $1 billion at the same point last year, according to data provided to Reuters by Income Securities Advisors.

The first-quarter data suggests defaults for all of 2011 would shrink compared with last year’s 84, which totaled $3 billion, said Richard Lehmann, the president of ISA, an investment advisory and research firm based in Florida.

“The default rate here is reflective of a more normal year, where typically about $1 billion worth of bonds will default,” Lehmann said. “Defaults were particularly high in the financial crisis, but have abated significantly since then.”

Lehmann’s review of rated and unrated municipal debt defines a default as the failure of the bond obligor to make a scheduled interest or principal payment to the trustee, regardless of who holds the bonds or whether bondholders lost money.

“For most localities this year is looking a little bit better than last year because ... tax revenue is beginning to pick up a little bit,” said David Wyss, chief economist at Standard & Poor’s Ratings Services. “I think there will be some defaults. I don’t think they’re going to be big ones.”

Whitney was traveling and could not immediately reply to a request for comment.

Last year, there were 22 defaults during the first quarter, totaling more than $1 billion, and 12 defaults in the final quarter, totaling about $444 million, Lehmann said.

Corporate debt, by contrast, registered six bond defaults in the first quarter of 2011, totaling $1.2 billion, compared with 32 defaults last year, totaling $17.6 billion, Lehmann said.

A separate report last week by S&P/Investortools Municipal Bond Index, which tracks about $1.3 trillion of rated and nonrated municipal outstanding debt, found the pace of municipal bond defaults has slowed in 2011.

There were 12 defaults in the first three months of 2011, representing $277 million of outstanding debt, according to the S&P index, which includes as a default any bond that lacked a full scheduled principal or interest payment to bondholders, as well as mandatory sinking fund payments.

At this time last year, there were 28 defaults, representing $1.154 billion of outstanding debt on the S&P index.

Among muni credits rated by S&P, there have been no defaults so far this year, after three defaults last year, a rating agency spokeswoman said.

Tax-exempt muni prices ended higher on Thursday, with yields on top-rated 10-year bonds declining 4 basis points to 3.18 percent and 30-year yields dropping 2 basis points to 4.80 percent on Municipal Market Data’s triple-A scale.

Reporting by Edith Honan; Graphic by Stephen Culp; Editing by Dan Grebler

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