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Here's Another "I Told 'ya So" for the Muni Buyers
From Bloomberg: Detroit Sells $250 Million Without Recent Disclosure Filings
March 11 (Bloomberg) -- Detroit, the largest U.S. city whose debt is rated below investment grade, will ask investors today to buy $250 million of its debt without having filed annual financial reports on time for five years.
The city, which warned investors in its preliminary official statement of the possibility of filing for Chapter 9 bankruptcy protection, is providing a June 30, 2008, financial statement, its most recent, to investors. A fiscal 2009 report is expected to be complete by May 31, said city spokesman Dan Lijana, in an e-mail.
...
The municipality is selling the same week that state and local governments are scheduled to bring more than $11 billion of long-term securities to market. The largest deals include $2 billion from California and $696 million from the District of Columbia.
Goldman Sachs
Detroit is selling $250 million of bonds through investment banks led byGoldman Sachs Group Inc. to help cover budget deficits expected to total $280 million this year. The deal will probably appeal to investors seeking high-yield municipal debt, predicted Ciccarone, precluding the city from a market with tax- exempt yields near three-month lows.
The city lost its investment-grade ratings as automobile makers in Michigan began cutting jobs and the tax revenue declined, which led to an expanding budget gap covered by short- term borrowing. The new bonds will spread repayment of the deficit debt across a longer period.
Detroit general obligations maturing in 2024 traded yesterday at a yield of 7.56 percent, according to Municipal Securities Rulemaking Board data. That compares with yields of 3.36 percent to 3.5 percent for top-rated 14-year municipal debt yesterday, according to Municipal Market Advisors Inc.
...
Detroit also disclosed there’s no precedent for how its state aid payments would be handled in the event of a Chapter 9 bankruptcy filing because there’s never been a local instance. “The lack of precedent in Michigan makes the risks associated with such a filing difficult to assess,” the preliminary offering statement said.
Financial Crisis
While the city is still in a financial crisis, “insolvency isn’t on the horizon or on the agenda,” said Mayor Dave Bing, in a prepared statement provided by Lijana [Reggie Comment: Of course, which is why the warning is there in the prospectus!]. A request to make finance officials available for comment was declined by Lijana.
...
Following are descriptions of pending sales of municipal debt in the
U.S.:...
CALIFORNIA,
the lowest-rated U.S. state, intends to raise as much as $5 billion
from investors this month with its first debt sales since November,
according to Treasurer Bill
Lockyer. JPMorgan Chase & Co. and Morgan Stanley were selected
to manage a tax-exempt deal of as much as $2 billion today, and
Citigroup Inc. and Bank of America Merrill Lynch will handle a taxable
offering later in the month, according to the state treasurer’s Web
site. California is rated A- by S&P, Baa1 by Moody’s and BBB by
Fitch. (Updated March 11)MASSACHUSETTS,
the second
most-indebted state per capita after Connecticut, plans to sell $538.9
million of floating-rate general obligations as early as this week. The
date of the sale will be determined by market conditions, according to
the state treasurer’s Web site. Proceeds will help refinance outstanding
variable-rate demand bonds supported by an agreement from Citibank that
expires later this month, according to Moody’s. Underwriters led by
Morgan Stanley will market the issue. The state’s general obligations
are rated Aa2 by Moody’s, while Fitch and S&P rate them AA, the
third-highest of 10 investment grades. (Updated March 9)ILLINOIS, the second-lowest rated U.S. state after California, will
take bids today from banks seeking to underwrite $300 million of Build
America Bonds and $56 million of non-subsidized taxable notes. The deal
will finance school construction, according to John
Sinsheimer, the state’s director of capital markets. Illinois,
which last sold Build America securities in a $1 billion deal on Jan.
28, is rated A2 by Moody’s, A+ by S&P and A by Fitch. A statutory
requirement calls for 25 percent of all state debt to be bid
competitively, Sinsheimer said. Banks led by William Blair & Co.
will negotiate the sale of an additional $700 million in Build America
securities in mid-March, he said. (Updated March 11)I made it clear to readers this was coming in May 14th of 2008, when all
of the naysayers were saying that is highly unlikely municipalities
will default on their debt. Well, we shall see. My past
prognostications: Municipal
bond market and the securitization crisis - part I (this is the
primer for those that don't follow Munis) and the (this is the kicker
for those that don't believe anyone can default) Municipal
bond
market and the securitization crisis - part 2 (should be read
by whoever is not a muni expert - this newsbyte
may
be worth reading as well).Here is an excerpt from Part 2:
Since we have maintained from the
beginning that this crisis is far worse than any crisis that the US
economy has witnessed for close to half a century, our underlying
assumption while calculating the default probabilities by GO and
Revenue
bonds has been a premium over historical default rates on the munis for
the period 1979-97. This premium is dependent on the degree of decline
in housing prices, building permits and the broader infrastructure
investment. In the case of Revenue bonds, the multiple has been
considered higher as compared to GO bonds since historically; Revenue
bonds have defaulted more than the GO bonds....
Multi family housing and healthcare
led the defaults in municipal bondsHistorically, housing and healthcare
sectors have been the biggest contributor to municipal defaults (after
the industrial development bonds which account for 24% of defaults). In
housing, the multifamily segment has
recorded maximum losses accounting for 19.3% of total defaults while
single family accounts for
1.1%. In the healthcare
sector, hospitals and nursing homes accounted for majority of defaults
of 7.5% and 7.1%, respectively.
Default rates in municipal bonds have
varied significantly across the subsectors. The defaults in the
tax-backed, water/sewer, and other plain vanilla municipal bonds has
been significantly low. According to Fitch Ratings (the only of the bigratings agencies that can garner even the slightest modicum of respect
these days), the cumulative default rates on such bonds have been less
than 0.26%. However, default rates in municipal bonds issued on behalf
of corporations or municipal entities were significantly
higher. Historically, the cumulative default rates were
14.9% for industrial development bonds, 4.9% for multifamily housing,
and 2.6% for health care.
Industrial development bonds,
multifamily housing and healthcare sector’s accounted for 8% of total
bond issuance and 56% of total defaults while education and general
purpose sectors accounted for 46% of issuance and 13% of defaults.
...
In the multifamily housing segment,
default rates increased significantly and were extremely high for the
period 1987-90, i.e. at the time of the S&L crisis when real estatelending was reckless due to declining lending standards by banks and
other financial institutions. The default rate
peaked in 1988 in the eleven year period reviewed to 4.31%, followed by3.41% in 1989. However,
the overall default rate for multifamily housing sector is 1.11% for
the
11 year period (1987-1997).
- advertisements -
see my blog post on Detroit: http://www.thepublicpurse.com/2009/11/10/detroit-pensions-and-securities...
It must be a feces fetish. The Reggie Milton BustBoom&Feces blog.
Reggie, if I may offer you a piece of advice. your papers are great, and I always learn a lot. But there is a bit too much chest thumping of I told you so. given time and probabilities almost all events can come true.
the question with your research is where and when to have entry and exit points.
Detroit's totally good for it dawg!
Oh-Bomber said he won't bail out the states...
it looks like a planned demolition of the United States...
Sometimes , I just want to move to the Phillippines ...
reggie, that's fine, but I bought my muni's at the height of the crisis when they were selling at 85 cents on the dollar.
I'd never buy them now, but everything has it's time. now thinking of getting rid of them
BB and TG stand ready to cover the coming muni sub-prime crisis, the CRE crisis, the pension crisis, the state crisis, the Greek crisis.....they are the ones the world has been waiting for!!!
If California and New York were near default on debt obligations would the Fed/Government allow a default? Imagine the deflationary effect this would have. Reread 'Bailouts 101' by BB and TG if in doubt.
Can you imagine the amount of individual investor capital that would be vaporized if defaults started occuring in Muni Land? That's who owns munis; Ma and Pa. The tax code has coerced individuals into munis with the tax exemption. That would be a massive blow to investor psychology.