WASHINGTON — Holders of debt issued by Detroit; Harrisburg, Pa.; Jefferson County, Ala.; and Stockton, Calif.; are unlikely to get outcomes even as favorable as investors during the Great Depression, according to a report issued Thursday by Moody's Investors Service.

While past defaults generally resulted from short-term liquidity issues, the most recent round reflect systemic issues more challenging to both overcome and make bondholders whole, according to Moody's analysts. Defaults during the Great Depression that began with the October 1929 stock market crash were largely the result of bank failures and resulting liquidity issues, the report notes. Bondholder recovery rates after the banks were reconstituted in 1934 reached 94%, Moody's said.

In fact, muni defaults since 1970 studied by the rating agency have averaged about an 80% recovery, though they have been rare. In a more recent example, Orange County, Calif., which defaulted on lease rental bonds in 1994 due to losses on investments, eventually repaid creditors 100%, it said. Baldwin County, Ala. defaulted on general obligation bonds in 1988 when it failed to keep enough cash on hand, but the county's creditors ultimately achieved 100% recovery.

These examples contrast with recent cases, which pit bondholders against pension recipients and involve long-term challenges such as shrinking tax bases. Detroit emergency manager Kevyn Orr has proposed paying GO bondholders 10 cents on the dollar after that city became the largest municipality to file for bankruptcy in history earlier this year. Jefferson County, previously the largest bankruptcy, might pay GO holders between 70% and 85% while sewer debt holders might get 58%, by Moody's estimate. Stockton's initial offer of 17% indicates a low eventual recovery rate, and Harrisburg's plan could result in a 60%-70% recovery pending additional developments, Moody's concluded.

Moody's analysts did not take into account the possibilities that bond insurers might provide at least some recovery relief in some of the recent defaults.

"All of our recovery estimates are based on recovery derived solely from the debt issuer or obligor," said Moody's analyst Ann Van Praagh, who worked on the report. "Our underlying ratings do not incorporate any additional recovery that may be derived from third parties, including bond insurance claims or other guarantors."

Van Praagh said that when the recovery plan involves the issuance of new securities, or the original bonds with different terms, the agency uses a market-based discount rate to estimate the value of the new or modified bonds relative to the principal at the time of default, plus the accrued interest over that time. The report also adds that bondholders might be willing to accept lower rates to avoid lengthy litigation, and that if governments in recent cases succeed in offering low settlement rates, other municipalities may turn to bankruptcy as a way to regain their economic footing.

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