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Here’s Another “I Told ‘ya So” for the Muni Buyers

Courtesy of Reggie Middleton

From Bloomberg: Detroit Sells $250 Million Without Recent Disclosure Filings 

March 11 (Bloomberg) — Detroit, the largest U.S. city whose debt is rated below investment grade, will ask investors today to buy $250 million of its debt without having filed annual financial reports on time for five years.

The city, which warned investors in its preliminary official statement of the possibility of filing for Chapter 9 bankruptcy protection, is providing a June 30, 2008, financial statement, its most recent, to investors. A fiscal 2009 report is expected to be complete by May 31, said city spokesman Dan Lijana, in an e-mail.

The municipality is selling the same week that state and local governments are scheduled to bring more than $11 billion of long-term securities to market. The largest deals include $2 billion from California and $696 million from the District of Columbia.

Goldman Sachs

Detroit is selling $250 million of bonds through investment banks led byGoldman Sachs Group Inc. to help cover budget deficits expected to total $280 million this year. The deal will probably appeal to investors seeking high-yield municipal debt, predicted Ciccarone, precluding the city from a market with tax- exempt yields near three-month lows.

The city lost its investment-grade ratings as automobile makers in Michigan began cutting jobs and the tax revenue declined, which led to an expanding budget gap covered by short- term borrowing. The new bonds will spread repayment of the deficit debt across a longer period.

Detroit general obligations maturing in 2024 traded yesterday at a yield of 7.56 percent, according to Municipal Securities Rulemaking Board data. That compares with yields of 3.36 percent to 3.5 percent for top-rated 14-year municipal debt yesterday, according to Municipal Market Advisors Inc.

Detroit also disclosed there’s no precedent for how its state aid payments would be handled in the event of a Chapter 9 bankruptcy filing because there’s never been a local instance. “The lack of precedent in Michigan makes the risks associated with such a filing difficult to assess,” the preliminary offering statement said.

Financial Crisis

While the city is still in a financial crisis, “insolvency isn’t on the horizon or on the agenda,” said Mayor Dave Bing, in a prepared statement provided by Lijana  [Reggie Comment: Of course, which is why the warning is there in the prospectus!]. A request to make finance officials available for comment was declined by Lijana.


Following are descriptions of pending sales of municipal debt in the U.S.:

CALIFORNIA, the lowest-rated U.S. state, intends to raise as much as $5 billion from investors this month with its first debt sales since November, according to Treasurer Bill Lockyer. JPMorgan Chase & Co. and Morgan Stanley were selected to manage a tax-exempt deal of as much as $2 billion today, and Citigroup Inc. and Bank of America Merrill Lynch will handle a taxable offering later in the month, according to the state treasurer’s Web site. California is rated A- by S&P, Baa1 by Moody’s and BBB by Fitch. (Updated March 11)

MASSACHUSETTS, the second most-indebted state per capita after Connecticut, plans to sell $538.9 million of floating-rate general obligations as early as this week. The date of the sale will be determined by market conditions, according to the state treasurer’s Web site. Proceeds will help refinance outstanding variable-rate demand bonds supported by an agreement from Citibank that expires later this month, according to Moody’s. Underwriters led by Morgan Stanley will market the issue. The state’s general obligations are rated Aa2 by Moody’s, while Fitch and S&P rate them AA, the third-highest of 10 investment grades. (Updated March 9)

ILLINOIS, the second-lowest rated U.S. state after California, will take bids today from banks seeking to underwrite $300 million of Build America Bonds and $56 million of non-subsidized taxable notes. The deal will finance school construction, according to John Sinsheimer, the state’s director of capital markets. Illinois, which last sold Build America securities in a $1 billion deal on Jan. 28, is rated A2 by Moody’s, A+ by S&P and A by Fitch. A statutory requirement calls for 25 percent of all state debt to be bid competitively, Sinsheimer said. Banks led by William Blair & Co. will negotiate the sale of an additional $700 million in Build America securities in mid-March, he said. (Updated March 11)

I made it clear to readers this was coming in May 14th of 2008, when all of the naysayers were saying that is highly unlikely municipalities will default on their debt. Well, we shall see. My past prognostications:  Municipal bond market and the securitization crisis – part I (this is the primer for those that don’t follow Munis) and the  (this is the kicker for those that don’t believe anyone can default) Municipal bond market and the securitization crisis – part 2 (should be read by whoever is not a muni expert – this newsbyte may be worth reading as well).

Here is an excerpt from Part 2:

#1f1f1f; text-align: justify;”> Since we have maintained from the beginning that this crisis is far worse than any crisis that the US economy has witnessed for close to half a century, our underlying assumption while calculating the default probabilities by GO and Revenue bonds has been a premium over historical default rates on the munis for the period 1979-97. This premium is dependent on the degree of decline in housing prices, building permits and the broader infrastructure investment. In the case of Revenue bonds, the multiple has been considered higher as compared to GO bonds since historically; Revenue bonds have defaulted more than the GO bonds.

#1f1f1f; text-align: justify;”> Multi family housing and healthcare led the defaults in municipal bonds

#1f1f1f; text-align: justify;”> Historically, housing and healthcare sectors have been the biggest contributor to municipal defaults (after the industrial development bonds which account for 24% of defaults). In housing, the multifamily segment has recorded maximum losses accounting for 19.3% of total defaults while single family accounts for 1.1%. In the healthcare sector, hospitals and nursing homes accounted for majority of defaults of 7.5% and 7.1%, respectively.

#1f1f1f; text-align: justify;”> Default rates in municipal bonds have varied significantly across the subsectors. The defaults in the tax-backed, water/sewer, and other plain vanilla municipal bonds has been significantly low. According to Fitch Ratings (the only of the big ratings agencies that can garner even the slightest modicum of respect these days), the cumulative default rates on such bonds have been less than 0.26%. However, default rates in municipal bonds issued on behalf of corporations or municipal entities were significantly higher. Historically, the cumulative default rates were 14.9% for industrial development bonds, 4.9% for multifamily housing, and 2.6% for health care.

#1f1f1f; text-align: justify;”> Industrial development bonds, multifamily housing and healthcare sector’s accounted for 8% of total bond issuance and 56% of total defaults while education and general purpose sectors accounted for 46% of issuance and 13% of defaults.

#1f1f1f; text-align: justify;”>

#1f1f1f; text-align: justify;”> In the multifamily housing segment, default rates increased significantly and were extremely high for the period 1987-90, i.e. at the time of the S&L crisis when real estate lending was reckless due to declining lending standards by banks and other financial institutions. The default rate peaked in 1988 in the eleven year period reviewed to 4.31%, followed by 3.41% in 1989. However, the overall default rate for multifamily housing sector is 1.11% for the 11 year period (1987-1997).

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