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.
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.
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:
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.
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.
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.
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.
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.