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Defaults Reached Record in 2014

Municipal bond defaults increased to record levels last year, as Detroit's bankruptcy boosted the total.

Municipal Market Analytics data as of Jan. 9 show $9.02 billion in monetary defaults for the year, up from $8.57 billion in 2013 and $1.95 billion in 2012. The 2014 par value was the highest since MMA's Default Trends was founded in 2009,  according to managing director Matt Fabian. Before that, monetary defaults on municipal bonds had been relatively rare since the Great Depression.

S&P Dow Jones Indices reported Tuesday that the portion of deals it follows that were in default rose in 2014 to the highest level since 2011. The portion of deals in default went to 0.17% from 0.107% in 2013. The rate was 0.227% in 2011.

While Detroit's problems are likely to recede after the city exited bankruptcy, defaults may remain elevated in 2015, as the Puerto Rico Electric Power Authority is expected to announce a bond restructuring as soon as March. As of August 2014 PREPA had $8.3 billion in revenue bonds outstanding.

According to MMA's Default Trends, the biggest default of 2014 was on Detroit's water and sewer bonds. Default Trends considers $5.4 billion of the Detroit Water and Sewer bonds as having defaulted in September. Not all of the securities were defaulted on but Default Trends considers all parity bonds in default.

The second largest default was on industrial development bonds from conduit issuers for TXU, a subsidiary of Energy Future Holdings Company, which declared bankruptcy in April. TXU collapsed leading to default on $1.16 billion in bonds.

While the par values of defaults have increased in the last three years, the number of municipal issuers defaulting for the first time fell to 58 last year, from 108 in 2012 and 68 in 2013.

On the other hand, the number of issuers in Default Trends' "active status" of either default, reserve draw or other impairment, at the end of 2014 was 907 issuers, up from 798 issuers at the end of 2013.

Nonprofit hospital and local non-general obligation sectors showed the most significant increases in terms of number of issuers to default.

The increase in the local non-GO category may have been because the Securities and Exchange Commission's Municipalities Continuing Disclosure Cooperation initiative had a Dec. 1 deadline requiring increased filings, Fabian said.

The increase in hospital filings may reflect the impact of the Affordable Care Act on hospitals, Fabian said.

Whereas S&P found 35 municipal deals in default in 2014, MMA found 58 issuers defaulted in the same year. Fabian said Default Trends examines hundreds of written notices on Electronic Municipal Marketplace Access each week. Many defaults aren't listed as default notices but in the "Other" category, he said. If insurance covers payments by issuers, Default Trends will not consider the issuer to be in default.

S&P's municipal bond high yield index showed the high yield default rates to be 1.52% in 2011, 1% in 2012, 0.807% in 2013, and 1.264% in 2014. By comparison, its United States Speculative Grade Corporate Bonds Index had default rates of 1.98% in 2011, 2.6% in 2012, 2.1% in 2013, and 1.52% in 2014.

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