Retail reaction to the announcement late Wednesday that Jefferson County, Ala., filed the largest municipal bankruptcy in U.S. history is likely to be muted, yet will still be closely monitored, portfolio managers say.
Still, portfolio managers were in preventive mode Thursday, as they issued statements to ward off any fears that the bankruptcy headline risk could spark and spread among investors of all stripes.
Most likely, the market would not see outflows from retail muni bond fund investors resulting from the bankruptcy, said Peter Hayes, head of BlackRock's municipal bonds group with oversight of $95.6 billion in municipal assets, at a press briefing. This is because most investors weren't caught off guard by the filing, he added. They have known about the county's risk for bankruptcy for some time.
"Investors have been watching this for so long that it won't necessarily be an event in the muni market," Hayes said. "The bigger question is the potential ripple effect. It is the biggest bankruptcy utilizing Chapter 9, and all of a sudden you'd have to look at retail investors who have spent most of the year regaining confidence in the muni market and wonder if this would cause those investors to rethink."
At the same press briefing, Joseph Pangallozzi, a director and municipal research analyst at BlackRock, commented that investors should not view Jefferson County's bankruptcy as the first of many to come.
"For JeffCo to be a broad indicator of further problems, other local governments would have to share a similarly distressed credit profile," Pangallozzi said, "and the fact is, they don't."
Many across the industry will watch for calls by retail investors for redemptions and reallocations from their municipal bonds funds. Retail investor panic would take many back to a dark period for muni bond funds that began almost a year ago that was sparked by predictions of large municipal defaults.
The industry clearly recalls how money hemorrhaged from muni bond funds between mid-November and early June, often by more than $1 billion a week. In the week of Jan. 19, investors in weekly reporting funds pulled more than $4 billion.
For eight of the past nine weeks, though, muni bond funds that report their flows weekly have seen inflows, according to Lipper FMI numbers.
Jefferson County commissioners said they weren't able to come to terms with creditors over restructuring $3.14 billion of defaulted sewer debt.
The marketplace hasn't yet seen a ripple from the bankruptcy filing, said Tim Pynchon, a portfolio manager at Pioneer Investments. For the most part, it has already separated out Jefferson credits from the healthier variety, he added; his own fund does not include Jefferson credits.
"As a marketplace, we've taken that individual credit, JeffCo, and placed it in its own silo," he said. "Is this the start of the domino effect? No. And no one sees it like that. It's a specific set of circumstances. You don't take that overlay for Jeffco and place it on, say, some county in Texas."
Cumberland Advisors expects to see little market impact on trading in Jefferson County bonds, wrote John Mousseau, a portfolio manager there who heads the tax-free muni section, in a statement.
Jefferson County refunded most of its fixed-rate sewer debt with variable-rate demand bonds and auction-rate securities in 2002 and 2003, Mousseau added. And the trades the firm has seen, as well as local dealer quotes, have been at high interest-rate levels.
With the Chapter 9 filing, Cumberland would expect to see more trading in the bonds, Mousseau wrote. "Participants most affected are the [letter-of-credit] banks that hold the failed remarketed debt and bond insurers," he wrote, "not bondholders."