The global spiderweb of debt

If you are not familiar with the municipal bond market, you may think that muniland is nothing more than states, municipalities and school districts offering plain bonds that mature on a set date and offer a fixed interest rate. That is the textbook description.

Actually the municipal bond market is a murky tangle of odd bond structures, variable-rate debt, multiple layers of issuers and bank guarantors. The lack of standardization of bond structures and relationships is one of the main reasons that the asset class has never migrated to the internet for retail investors.

Often the odd bond structures can create much more exposure to the tides of global affairs than plain vanilla bonds. The biggest example now is the Belgian-French bank Dexia, which is a big guarantor of U.S. muni bonds.The WSJ reported in an excellent article that investors are selling off muni bonds that Dexia insures:

From a skating rink in Everett, Wash., to New York City’s schools to Chicago’s O’Hare International Airport, interest rates on some bonds have soared since late May and could rise even further because money-market investors are less willing to buy some of the $17 billion in municipal bond deals backed by Dexia SA, a Belgian-French bank shaken by its exposure to government debts in Greece.

The problem with Dexia’s role here is that many U.S. municipalities issued debt for long-term capital projects (think school buildings, sports arenas, bridges) and agreed to borrowing terms that are reset on a weekly or daily basis. Imagine a super-charged ”adjustable rate” mortgage that is constantly moving around depending on interest rates. The adjustable daily/weekly rates are short-term rates. So the issuer has the benefit of funding long-term projects with very low short-term rates. It works really well — until it doesn’t.

Save the $100,000 that Meredith Whitney charges for research

Just the numbers please

You can save the $100,000 that Meredith Whitney charges for her research. Reuters has the data on municipal bond issuers with the weakest profiles by bond-market standards. Puerto Rico leads the pack as the least credit-worthy issuer. Issuer Weekly Yearly Outstanding Unfunded S&P Moody's Spread* Average Tax-supported Debt Pension Rating Rating Puerto Rico 225 203.7 $40 bln $24 bln BBB A3 Illinois 174 175.5 $24 bln $62 bln A+ A1 California 95 106.3 $87 bln $50 bln A- A1 Michigan 80 81.2 $7 bln $12 bln AA- Aa2 Nevada 70 68.0 $2 bln $2 bln AA Aa2 New Jersey 65 54.7 $32 bln $37 bln AA- Aa3 D.C. 60 57.3 $6.4 bln $0 A+ Aa2 N.Y. City 47 55.7 $61 bln $76-122 bln AA Aa2 Rhode Isl. 47 45.9 $2 bln $4 bln AA Aa2 Ohio 38 31.9 $11 bln $2.9 bln AA+ Aa1 *In basis points for the week ended June 17, 2011, Sources: Municipal MarketData, Moody's Investors Service, Standard & Poor's Ratings Services, local government budget reports, official statements

The roots of delusion

Small snippet from an excellent piece in the New York Times on the roots of the unfunded pension mess (emphasis mine):

No allowance if you don’t do your homework

Photo: California State Controller John Chiang

No allowance if you don’t do your homework

California’s Legislature rushed through a budget last week that they thought was balanced. The State Comptroller has ruled otherwise, and now he is withholding lawmakers’ salaries, the New York Times reports today:

California lawmakers will lose at least a week’s pay and living expenses because the state budget they passed last week was not balanced, the state controller said Tuesday.

When the Legislature approved the budget, several lawmakers praised themselves for passing it on time for only the second time in two decades. And they assumed that meeting the deadline would allow them to collect their full paychecks.

Muni swaps moving higher

Lisa Pollack of Markit in London sent over some interesting charts of U.S. municipal swaps. I put up this one which shows the market perception that risk is increasing again for some states, particularly Illinois and California. It is important to remember that these markets are thinly traded and that there is a large block of muni CDS written on California that is coming to market from the bankruptcy of Lehman Brothers.

National Totals of State Tax Revenue, by Type of Tax

The U.S. Census brings us these figures for taxes collected at the state level for 2010. You can see the substantial reliance on individual income and sales taxes (I left off some categories to fit the table in. Click through to the Census document to see more data): Quarter Total tax Individual income Corporate income Property tax State sales tax 2010 4Q $ 177B $ 61B $ 9B $ 4B $ 57B 2010 3Q $ 168B $ 57B $ 7B $ 3B $ 56B 2010 2Q $ 204B $ 72B $ 14B $ 3B $ 54B 2010 1Q $ 163B $ 52B $ 8B $ 8B $ 54B


Muni sweeps: Employment slightly better

We are making some headway on unemployment although some states still have substantial problems. For the larger, original version from Calculated Risk Blog click here.

Muni tax exemption “on the table”

Bond Buyer reports:

Two weeks ago, about a dozen issuer advocates met with staff members for Democrats and Republicans on the Senate Finance Committee to emphasize the important role tax-exempt bonds play in infrastructure development.

The issuer groups were told by staffers that the tax exemption of muni bonds was on the table as part of discussions on spending cuts, and that the committee may soon schedule hearings on this subject, sources involved with the meeting said.

Muni sweeps: California’s first budget veto

Some thorny action in California on the state budget:

California Governor Jerry Brown, who failed to win Republican support of tax extensions in six months of negotiations, said he’d “move heaven and earth” in another attempt after vetoing a budget without the provision.

Brown, a Democrat who pledged to solve California’s fiscal malfunctions without gimmicks, didn’t say how he’d get the Republican backing needed to pass his plan. His budget veto was the first in state history.

Rocking back and forth

Chip Barnett of Reuters brings us the weekly numbers on muniland flows:

U.S. municipal bond funds posted $172 million of net outflows in the week ended June 15, according to Lipper data issued on Thursday.

Chapter 9: Muniland’s long road to bankruptcy

There has been so much talk in muniland about massive defaults, but so far there has been very little discussion about the actual mechanism of default and municipal bankruptcy. Public entities generally try everything before resorting to default or bankruptcy. The video above is an excellent primer on the many choices that can be made leading up to the end game.

Bond defaults can happen with or without a bankruptcy. Here is Wikipedia’s definition of default:

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay their debt.

The pros of muniland

Muniland is the subject of a lot of professional research, and I thought readers would enjoy seeing some of it. I’m going to highlight some of the best bits.

From Chris Mauro, Director of Municipal Research at RBC Capital Markets:

The Potential Impact of Federal Deficit Reduction on the States

    Deficit reduction continues to be a major focus of both the Administration and Congress. Recent rating agency warnings about the stability of the existing US AAA rating have added a sense of urgency to the discussions and it seems likely that any deficit plan will result in cuts to federal discretionary spending.
    We estimate that discretionary federal aid to the states accounts for, on average, about 11% of total state expenditures. While we don’t anticipate an abrupt reduction in this funding, even a gradual reduction will pressure state budgets, potentially negating some of the modest growth in tax revenues that states are currently realizing.

Like It’s 1999

    State general government employment is down to early 1999 levels and the cuts show no signs of moderating.
    Given the aggressive cost cutting at the state and local level, we take issue with the casual comments about federal “bailouts” of these entities. No government officials that we know of have asked for such a thing, so where is this notion coming from?

From Chris Shayne of Bonddesk:

Muni sweeps: Muniland reins in the borrowing

Excellent chart from Barry Ritholtz’s The Big Picture. He uses data from the Federal Reserve’s Flow of Funds Accounts to map credit flows. State and local governments have become negative borrowers in the first quarter as the amount of bonds that have matured and the amount of principal that has been repaid exceeded new bond issuance. States and municipalities are making the hard fiscal choices and restraining borrowing and expenditures. It’s painful, but it must be done.

Delaware opens the procurement kimono


Delaware has launched a new website to make it easier for entrepreneurs, small businesses, and other employers to do business with the State of Delaware. The new website will serve as a resource for companies interested in bidding for State contracts. The Governor hopes that the site will make the bidding process easier and more transparent for business owners so they can create jobs in the state easily…

…The public will also be able to see state spending trends and details of contract usage. The public can also access business development tools, customer satisfaction surveys and “I Found it Cheaper,” which allows individuals to submit suggestions on how the State can procure goods for less money.

Something smells funny around Yankee Stadium

Bloomberg covered an interesting story today about the bonds which financed the parking garages at Yankee Stadium in New York. The $237 million of securities are “revenue” bonds issued by the Empire State Development Corporation. They have no guarantee and no rating, and it looks likely that the bonds will default.

The main reason that the bonds face default is that attendance at Yankee games is off about 10% from last year. I don’t follow baseball so I’m not sure why that is happening (if you have ideas please leave in the comments below). But the revenue for these parking garages has declined much more steeply than baseball attendance. Bloomberg says this about the garage revenue:

Revenue from the garages and parking lots managed by the nonprofit is almost 40 percent below projections as the facilities face competition from public transportation and other parking at a mall near the stadium.

  • # Editors & Key Contributors