So where are all the muni bond defaults? - Investment News

One of the most common discussions I'm having with clients these days is about the credit quality of municipal bonds.

Small wonder. It's hard to pick up a newspaper these days without reading about the serious and deep fiscal crisis that many states and local governments are facing. And yet municipal bonds remain essentially unscathed.

The simple truth is that municipalities need the bond market more than it needs them. Delay or default on your debt obligations, and you lose your access to capital. And unlike individuals or corporations - who can use the bankruptcy code to avoid payments - many municipalities are legally prohibited from seeking bankruptcy protection.

Here's a section from today's Investment News:

“Municipal credit concerns have diminished,” Janney Montgomery Scott LLC, a Philadelphia-based adviser, said in a note to bond clients on July 12. “Investors continue to seek tax-free income and the strong credit track-record of general- obligation and essential-purpose municipal bonds.”

Lawmakers are willing to anger voters with reduced services and higher taxes to retain the favor of investors, who buy more than $400 billion of state and local debt each year to finance roads and bridges, pay for new schools and maintain parks and libraries...

Municipal bonds default less than company debt, Moody's said in a February report. The average failure rate for investment-grade municipal debt from 1970 through 2009 was 0.03 percent, compared with 0.97 percent for similar corporate bonds, the analysis said. Of 54 municipal defaults in the period, only three were general-obligation bonds backed by the full faith and credit of the issuers, Moody's said.

Defaults occur when a borrower misses interest payments or fails to maintain adequate reserves for future interest. Since the Great Depression of the 1930s, only one state -- Arkansas -- has defaulted. That was after it assumed debts of its municipalities to keep them from financial failure.

Most of the $15.5 billion of such events in the municipal market since 2008 involved debt backed by specific revenue streams, like levies on new Florida housing developments, rather than by a government's obligation to repay investors from taxes.

So where are all the muni bond defaults? - Investment News