Alabama has the highest national “impairment rate” at 15%, according to a new database that tracks state-specific municipal default rates.
Research firm Municipal Market Advisors for the first time created the State Default Index which shows the percentage of outstanding bonds issued by any municipal borrower within a state that have a current, uncured payment default.
MMA sees improvement in defaulting bonds. In 2012, only 93 unique issuers filed notices of their first payment default on $1.7 billion. This compares to 2011 where 129 municipalities defaulted for the first time on $6.5 billion and 140 issuers defaulted on $3.2 billion in 2010.
The 2012 numbers are expected to rise in the coming months, but it is unlikely that the total numbers will not rise much higher than 100 issuers or above $2 billion, Fabian said.
MMA defines a state’s total impairment rate as the number of outstanding bonds with an uncured problem divided by the total outstanding, non-pre-refunded bonds. Impaired means any bond in payment default, tapping emergency support to cover its debt service, or some other kind of problem, said Matt Fabian, managing director with MMA.
Alabama’s rate is “largely attributable to Jefferson County’s massive impairment,” Fabian wrote in a research note Tuesday.
“The state itself has played a critical, highly adversarial role in the crisis, making life difficult for both the country and bondholders,” Fabian said. “Investors should assume that other distressed issuers could and would be treated in a similar fashion.”
Fabian also said that one takeaway from the index is that there could be a greater risk in lending to state or local governments in Alabama.
In November 2011, Jefferson County, Ala. filed Chapter 9 papers, making it the biggest U.S. municipal bankruptcy at the time.
In June 2012, Stockton, Calif., became the largest U.S. city to file for bankruptcy. And San Bernardino, Calif., was the most recent city to approve a bankruptcy after city council members learned there was only $150,000 in its bank account.
California has a 2.77% impairment rate with more than 15,000 total impaired bonds.
“California’s relatively high rate of impairment directly precipitates from that state’s past and ongoing attempts to draw revenue away from local governments,” the report said.
There are eight states including Alabama whose total impairment rate exceeds the 1.35% national average including: California, Florida, Georgia, Ohio, Oklahoma, Rhode Island and Virginia. These states account for 71% of the impaired value in the index.
“Looser borrowing limits within local debt laws, easier access to conduit financing and/or more growth-oriented real-estate development laws all may lead to structurally higher default and impairment rates across a state,” Fabian wrote.
By contrast, 16 states including Guam, Washington, D.C. and the U.S. Virgin Islands, had an impairment rate less than one-tenth of the national average.
“These states have created, statistically at least, a safer environment for lenders and borrowers and should warrant further consideration for primarily default-averse investors in any state,” the report said.