A recent study of municipal bond defaults by Moody’s Investors Service shows that recovery rates after defaults are fairly good.
The study also shows that default rates remain low and that historically, most defaults have been in the health care and housing sectors.
“U.S. Municipal Bond Defaults and Recoveries, 1970-2011” looks at Moody’s rated issuers. The number of rated issues examined increased gradually from about 1,500 in 1970 to about 17,700 in 2011. Both general obligation and non-GO debt was examined.
The study only counted actual defaults leading to changes in the timing or amount of payments, not technical defaults. It also did not count delayed payments made within contractually allowed grace periods.
The study’s authors, vice president Merxe Tudela, vice president Alfred Medioli, and managing director Anne Van Praagh, found that the average ultimate recovery rate on defaulted U.S. municipal bonds is generally higher than the average for defaulted senior unsecured corporate bonds. The average ultimate recovery rate for munis was 65% for the 1970-to-2011 period. By comparison, the same rate for corporates was 49%.
These are averages and the actual recovery rates on defaulted bonds varied from 100 cents on the dollar to 5 cents on the dollar.
Recovery rates were calculated “as the discounted recovery rate based on the value creditors actually received at the resolution of the default event relative to what they should have contractually received, inclusive of any accrued interest,” the report said.
Default rates in 2010 and 2011 averaged 5.5 defaults per year of the rated debt. This was up from an average of 2.7 annual defaults from 1970 to 2009, though in the 1970s, Moody’s rated substantially fewer bonds. Despite this increase, muni default rates “remain very low,” the authors said.
In the last five years, speculative-grade munis had a peak 12-month default rate of about 4% in late 2010, the authors report. By comparison, in the last five years speculative-grade corporate bonds had a peak 12-month default rate of about 13% in 2009.
The study also found that 73% of all municipal defaults occurred in the health care and housing sectors.
In January, Standard & Poor’s released a report on municipal bond defaults for 2011 showing that defaults were down 54% to 2011 from 2010, by par value. By number of bonds defaulting, defaults were down by 60% from year to year. The Standard & Poor’s study was broader than Moody’s study. It looked at 59,000 bonds, many of them not rated by Standard & Poor’s.
