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Distress Complicates Muni Bond Market

MAR 28, 2012 10:24am ET
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PHILADELPHIA — While the municipal bond market is still strong, experts agree that increasing local financial strain makes the landscape more complex.

“At the end of the day, it doesn’t matter whether you call it bankruptcy or not. It’s still distress,” Piper Jaffray & Co. managing director Yaffa Rattner said Tuesday at The Bond Buyer’s Symposium on Distressed Municipalities.

“Bankruptcy does not connote default and default does not connote bankruptcy,” Rattner said during a roundtable discussion before an estimated 260 persons at the Hyatt at the Bellevue hotel. She cited Stockton, Calif., which has yet to file bankruptcy, but whose City Council voted Feb. 28 to suspend payments toward $110 million of general fund-supported bonds through June 30.

Pennsylvania’s capital, Harrisburg, skipped $5.3 million of general obligation bond payments earlier this month, saying it needed the money for basic services such as police.

“Cities are starting to clarify what they’ll pay and not pay,” said Jon Schotz, a co-portfolio manager with Saybrook Capital.

David Penchoff, chief credit officer for municipal finance with bond insurer Assured Guaranty Corp., said his firm tries to be proactive. “We have relationships with our clients and when we have issues, we try to work things through. Most of the time we are successful. There are times when local politics comes into play. We need politicians with the guts to say, 'We made this commitment.’”

Naomi Richman, a managing director for public finance at Moody’s Investors Service, acknowledged that bankruptcy courts, given little legal precedent, represent a huge variable.

“There are so few data points on Chapter 9 bankruptcies; we’re reading all the tea leaves,” said Richman. “In the 1980s, the stigma of corporate-style bankruptcy faded away. Recently, the same thing happened with the residential housing collapse. Bankruptcy is seen as a strategy.

“Could something like this happen in municipal bankruptcies? Certainly that’s something we’ll be curious about.”

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