Report: Default Trends Improving in First Half of 2013

WASHINGTON – Although municipal issuer defaults in the first half of 2013 are at a multi-year high at $7.6 billion, overall sector trends appear to be improving, according to a report published by Municipal Market Advisors Tuesday.
 
The first half of 2013 “was perhaps the best six months recorded since MMA began tracking municipal impairments in 2009,” wrote Matt Fabian, managing director of MMA. The large par number mostly reflects part four issuers who have defaulted including Jefferson County, Ala., Stockton, Calif., West Penn Allegheny, Pa., and Detroit, Mich.  In June, Detroit issued a moratorium on all debt service payments.
 
While these four defaults “illustrate how risk indeed exists in the municipal bond market, all of these credits represent older problems that only this year ripened into defaults,” Fabian wrote.
 
Unique municipal issuers reporting first time defaults totaled only 26 in the first half of this year, far below the first half of 2012, when there were 45 defaults and the first half of 2011 when there were 58, the report said.
 
The report identified four different factors for the decrease in defaults so far in 2013. There is an increasingly limited supply of most-vulnerable issuers and there is a dearth of new risky-sector and aggressively structured issuers in the years immediately following the financial crisis.  An improving economy combined with an aggressive hunt for yield by investors has led to market-based restructurings for failing credits. Finally, there is less pain shifted lower in the intergovernmental structure due to a boost in state and local revenues.
 
Land secured issuers were the most frequent first time defaulters, totaling seven, for the first half of 2013, the report said. Water and sewer issuers were the second most first time defaulters with five and local non-governmental obligation credits were third, with four. There were no water and sewer defaults in the first half of 2012 and only one local non-governmental obligation bond issuer.
 
“These trends are somewhat concerning, but remember that the full number at issue is four or five defaults total … and the majority of those very small issuers without ratings,” Fabian said.
 
In general, default and impairment risk across the muni market appears to be falling, the report said. As of June 30, $16.2 billion of all outstanding municipal bonds were associated with an uncured payment default, an extremely low number, the report noted.