Are muniland bondholder haircuts a growing trend? Actually, recoveries (the principal and interest that the bondholders recover in a default) have varied a lot, according to a Moody’s municipal default report published in May:
Recovery rates are high but variable. Historical ultimate recovery rates on Moody’s rated defaulted US municipal bonds are generally higher than those for unsecured corporate bonds. On average, the ultimate recovery for municipal bonds was about 60 percent for the period 1970-2012, compared to 49 percent ultimate recovery rate for corporate senior unsecured bonds over 1987-2012. However, municipal recovery rates for the relatively small subset of defaulted bonds are highly dispersed across individual bonds, ranging from full recovery to two cents on the dollar.
When you drill into Moody’s default data, there is only one local government bond default where the recovery was less than 100 percent – the Belfield Limited Tax General Obligation default in 1987 – where bondholders ultimately recovered 55 percent of their principal (page 14). There were also recoveries of less than 100 percent on non-general obligation bonds. The low recoveries were almost always associated with housing or hospitals projects.
Jefferson County, Alabama is near an agreement with its bondholders to resolve the county’s bankruptcy. According to Moody’s, the agreement will require principal haircuts of about 40 percent – a recovery rate of about 60 percent. But those losses are not spread equally among bondholders. According to Al.com, the county’s bankruptcy attorney Kenneth Klee said that some creditors would take larger losses:
Klee said the agreement means creditors will receive about $1.835 billion instead of $3.078 billion. JPMorgan will give up about $842 million of the $1.2 billion in sewer debt it holds, according to Klee. In all, JPMorgan will give up about 88 percent of its total claims, he said.