WASHINGTON - Default rates in the tax-exempt municipal market are on pace to jump significantly this year, particularly in the housing sector which has been hit by the credit crunch, according to statistics compiled by a newsletter based in Miami Lakes, Fla.

Through May, 89 muni bond issues totaling $1.6 billion defaulted, compared to just 21 issues totaling $263.7 million in all of 2007, according to Distressed Debt Securities, which tracks corporate and muni defaults.

Richard Lehmann, publisher of the newsletter, stressed that the 2007 figures were atypically low because in most years, defaults affect more than $1 billion of debt, as in 2006, when there were defaults of 61 bond issues totaling $1.2 billion. Defaults can occur when issuers miss debt service payments or are forced to draw down reserves.

But even when the largest chunk of this year's defaults - roughly $759 million of debt issued by Vallejo, Calif., which last week filed for Chapter 9 bankruptcy and would need court approval to make any debt service payments - is subtracted from the $1.6 billion figure, there are still roughly 40 issues totaling $927 million that defaulted during the first five months of the year, Lehmann said.

Though the market is not poised to hit the record default rate of roughly $5 billion set in 1991, that's much faster than the usual pace of defaults in an average year and largely attributable to the deteriorating housing market, Lehmann said.

"It's tied to the housing problems," he said. "Housing isn't getting better, so we can expect some more defaults."

Lehmann's statistics show that about 0.72% of the roughly $6 trillion of municipal securities sold between 1980 and the end of 2007 defaulted. Those figures translate into roughly 3,000 municipal defaults involving $43.2 billion of debt over the past 27 years.

Though the comparison is inexact, the 0.72% muni default figure is still much lower than a 10-year cumulative default rate of about 9.69% for speculative and investment-grade corporate bonds sold between 1970 and 2006, according to a Moody's Investors Service report released last year.

Lehmann said the majority of defaults involve bonds sold by conduit issuers on behalf of tax-exempt organizations or private firms and that state and local government debt accounts for far less than 1% of the 3,000 defaults during the 27-year period.

Certain conduit sectors have especially high default rates, he said, particularly the health care sector, and more recently, housing.

For instance, $408.7 million of defaulted debt this year is tied to 10 conduit issues that were sold for multiple community development districts located along the west coast of Florida, he said.

Though each of the 10 Florida issues was sold in a different county, they were all underwritten by Prager, Sealy & Co. , in Orlando. Officials at the firm did not return phone calls Friday.

Community development districts are special-purpose entities created under Chapter 190 of Florida law. They enable builders and developers to sell tax-exempt revenue bonds secured by assessments to finance all of the costs associated with infrastructure such as roads and transit facilities, utilities, sewer and water systems, recreation facilities, and more.

CDD bonds are usually sold unrated and uninsured to accredited investors.

 

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