Muni Market Chaos Sparked By Covid Has Potential To Trigger Default Tsunami

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by Tyler Durden
Monday, Apr 20, 2020 - 05:30 AM

The economic collapse triggered by COVID-19 lockdowns across America has torpedoed the municipal bond market, which has come under severe stress in the last 4-6 weeks. The Federal Reserve has expanded a bailout facility to make sure liquidity continues to flow to crucial states and municipal money markets. However, it appears a tidal wave of muni defaults is nearing. 

About 22 million Americans have lost their jobs in the last four weeks, the quickest ever period of job loss in the country's history, as it now appears turmoil is about to be unleashed deep inside the $3.9 trillion muni bond market.

Bloomberg notes, "hospitals, airports, stadiums and speculative ventures like the Virgin Trains USA railroad in Florida" have survived over the years through debt sales via government agencies, and much of this debt is backed by the revenue received from the asset. 

And now it becomes increasingly evident with much of the country in lockdown, millions out of work, and an economic depression that is unfolding, many of these companies that issued debt through muni markets might not be able to service their obligations and trigger a wave of defaults.

"Speculation about such strains contributed to a record-setting pullback from municipal-bond funds last month, sending prices tumbling by the most in at least four decades until they rebounded on optimism about the $2.2 trillion economic stimulus enacted in Washington," Bloomberg notes. 

Bloomberg compiled a list of borrowers that suggests the default wave has already begun: 

Senior Living

Senior living centers were already among the riskiest borrowers in the municipal market and the deadly pandemic that's swept through many homes for the elderly has made them even more so. At least eight senior living facilities have either defaulted or reported some kind of trouble since mid-March, according to data compiled by Municipal Market Analytics.

PSL Wiregrass LP, which issued $23 million bonds through Capital Trust Agency in Florida to build an 110-bed senior living facility, defaulted on its April 1 interest payment, in part because of cost increases connected to the virus. The Trousdale Foundation had to draw on reserve funds to make a April 1 bond payment, saying its financial strains have been "exacerbated" by additional staffing and safety protocols.

Factory Closures

A tire recycling company in Terre Haute, Indiana, said it won't be able to make loan payments backing municipal bonds sold in 2017 after the facility suspended production due to the virus, according to an April 6 regulatory filing by Pyrolyx USA Indiana LLC. The company has an interest payment due on June 1 it is unlikely to make. 

Columbia Pulp I LLC, a waste-to-pulp facility in Washington, has also suspended operations. Because of the uncertainty about when it will reopen, the company said it is looking to pursue "additional sources of capital to sustain its operations through this challenging time," according to an April 6 filing.

A California company building the world's first facility for converting debris from rice cultivation into fiberboard said it will run out of money in May, according to a filing to bondholders by CalPlant I LLC. The company said the coronavirus pandemic has caused construction delays and higher expenses.

Proton Facilities

The Provision Cares Proton Therapy Center, which operates facilities in Tennessee, said April 2 "under normal operating conditions, the operating proton centers have been unable to generate sufficient cash flow to service the bond debt." But the reduced number of patients because of the virus outbreak has made it even worse. Provision estimated the center's cash deficit after debt service for 2020 will be negative $16.9 million, a $6.5 million increase from 2019.


Virgin Trains USA, which runs a passenger railroad in Florida, issued a combined $2.7 billion in municipal bonds in 2019 to fund its extension to Orlando, a crucial step in its effort to turn a profit. It temporarily shut down after tourists and business travelers disappeared virtually overnight. In a disclosure document to bond holders the company said they plan to "monitor the situation" to decide when to reopen, maintaining that the construction work on the new leg is continuing on schedule. Ben Porritt, a spokesperson for Virgin Trains, declined to provide additional comment. 

The Las Vegas Monorail, which has already gone bankrupt once, asked for bondholders' consent to use cash in reserves for operations and to temporarily suspend required payments to those funds, according to a letter dated April 3. The Monorail indefinitely suspended service on March 18.

Besides the Fed meddling in municipal bond markets, we would like to remind readers the Fed is also intervening directly in:

  • Treasury markets 
  • Corporate bond markets (both IG and HY)
  • Commercial paper markets (short-term corporate debt market)
  • Asset-backed security market (everything from student loans to Certificates of Deposit and more)

It appears the Fed might be powerless over the latest muni default wave...