BOSTON — Risk costs vary by level of bankruptcy restrictions states place on localities, an insolvency expert said Thursday.
"The market seems to recognize that some municipalities have an easier path to bankruptcy protection," Tima Moldogaziev, an assistant professor of public finance and budgeting at the University of Georgia, said at a municipal finance conference at the Park Plaza Hotel in downtown Boston, co-hosted by Brandeis International Business School and The Bond Buyer.
According to Moldogaziev's study of general obligation bonds by all U.S. municipalities from Jan. 31, 2005, to Dec. 31, 2010, a four-basis-point cost exists for municipalities from states that conditionally authorized bankruptcies. A further three-basis-point penalty applies for states that unconditionally allow such filings, and states with statutory lien provisions. "Liens appear to matter," he said.
Twenty-three states do not authorize Chapter 9 filings. Twelve authorize them while 15 place conditions on such filings. "Rules have an effect on borrowing costs," Moldogaziev said.
"Our study finds the legal provisions within each state create regimes that resulting in a bankruptcy risk premium, while the statutory liens determine a securitization risk premium," said Moldogaziev. "In essence, a municipality's eligibility to file for bankruptcy protection becomes a feature of its securities that is priced in the municipal securities market."
Robert Doty, president of municipal securities consulting firm AGFS of Annapolis, Md., said the mere definition of bonds presents a huge variable. "Sometimes issuers try to fool us," he said. "Jefferson County, Ala., issued general obligation bonds but did not have the power to raise taxes."
The discussion comes as Detroit is immersed in the nation's largest bankruptcy filing, estimated at $18 billion.
Academics and finance professionals at the conference, which will run through Friday, are discussing recent developments in the municipal credit markets.
"It's really important for academics, business people and regulators all to talk to each other," said Brandeis professor and event coordinator Daniel Bergstresser. "Academic research becomes much more powerful when it's grounded in an understanding of how the world actually works. If you're in business, understanding how to harness high-quality research that's available can give you a defendable market position based on what's going on in the academic side."
Jess Cornaggia, a professor at Georgetown University's McDonough School of Business, said a home bias exists when analysts assign ratings.
"Ratings produced by an analyst who grew up in the state of the issuer [or received a college degree there] are more issuer friendly," he said, citing Moody's Investors Service and Standard & Poor's data from 2000 to 2012.
About one in eight analysts inflate home bonds by as much as one notch, he said. That number spikes to 1.25 on average if an outside analyst assigns a junk rating.
Issuers, he added, capitalize on home-field advantage. Local issuance after a "home" rating rises by as much as 10% by number of new issues and by 25% in dollar value, Cornaggia added.
