The COVID-19 pandemic led to a spike in smaller municipal borrowers raiding debt service reserve funds, a move that plugs temporary shortfalls but does not prevent defaults in the absence of long-term viability, Moody's Investors Service said in a report.
As lockdowns that started in March 2020 decreased revenue, some smaller-scale borrowers tapped reserve funds at an overall rate not seen since the Great Recession, the rating agency said, adding,82 borrowers disclosed first-time DSRF draws since April 2020, "of which we classify 35 as having averted delinquency, at least for now."
The list of 35 mostly unrated bonds were largely sold by special districts in states including Colorado, Illinois, and Missouri.
"Because the pandemic represented a temporary suppression of revenues for many bonds, DSRFs helped dozens avoid what might have otherwise been a delinquency," according to the report, issued Monday. "We expect the delinquency rate following pandemic-era DSRF draws will ultimately be lower than the 54% delinquency rate following DSRF draws in ordinary times."
In an examination of the 422 borrowers that have tapped reserve funds since issuers began disclosing them on the Municipal Securities Rulemaking Board's EMMA system in 2009, Moody's said they were largely local government special districts, including Florida community development districts, Colorado metropolitan districts, and Missouri transportation development districts.
While the pandemic drove an uptick in DSRF draws by senior living facilities and student housing projects, those sectors, along with the Florida districts had the highest rates of payment delinquencies since 2009, the report said.
The Colorado districts, in contrast, had a lower delinquency rate as many reported draws on surplus funds and the state's real estate market was strong in recent years, boosting increases in districts' pledged revenue, according to Moody's.
"DSRFs are critical for borrowers facing a temporary problem with some prospect of an improvement, but they are effectively a bridge to nowhere for borrowers that are going to default anyway," Moody's said.
Unrated senior living facility bonds sold by issuers in states, including Ohio, Pennsylvania, and Texas, accounted for most of the 21 delinquencies that occurred after reserves were tapped during the pandemic, according to the report.
It added, the senior living sector, which was risky even before the pandemic, was the most directly hurt by the pandemic.
