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Bankruptcies Show States Recovering From Recession: Joe Mysak

A South Carolina toll road’s Chapter 9 filing last week is just the third municipal bankruptcy this year, suggesting that states and municipalities may be emerging from the recession.

Bankruptcies and bond defaults both declined in the first half of 2010, as state and local governments raise taxes and fees and cut spending to patch holes in their budgets.

To date, 30 municipal issuers have defaulted on $1.5 billion in bonds, according to Richard Lehmann of the Distressed Debt Securities newsletter of Miami Lakes, Florida. In the first half of 2009, 138 issuers defaulted on $4.5 billion in bonds. That’s a decline of 80 percent, in terms of numbers of issues.

Only three municipalities declared Chapter 9 bankruptcy, down from four at this time last year, said James Spiotto, a partner at Chapman & Cutler LLP in Chicago and a specialist in municipal bankruptcy.

For all of 2009, 12 issuers filed for Chapter 9, according to the American Bankruptcy Institute in Alexandria, Virginia. That’s the most since 1994 when the total was 16, and a lot of public officials keep talking about it.

Keep in mind that these numbers are preliminary, and it sometimes takes a while for issuers or their agents to make full disclosure. They are still good news for a market that has been under siege for more than two years.

Bond Defaults

The worst recession since the Great Depression produced a record year for bond defaults: 2008, when $8.2 billion failed (162 issues). In 2009, $6.4 billion (187 issues) defaulted.

The previous record year for municipal bond defaults was the recession year of 1991, when $5 billion failed (259 issues). That was also the biggest year for Chapter 9 bankruptcies (18) during the past three decades.

Big names -- the nation’s major cities, counties, special districts and authorities -- are resisting bankruptcy and default. The filing by the Connector 2000 Association of Piedmont, South Carolina, last week joins bankruptcies by a municipal utility district in Texas and a hospital in Idaho, which are representative of the type of municipality -- small, rural -- that typically reorganizes under Chapter 9.

Note the Las Vegas Monorail isn’t included in the tally. The Monorail filed Chapter 11 bankruptcy in January. The move was contested by Ambac Assurance Corp., which said Chapter 9 would have been more appropriate. A bankruptcy judge upheld the Chapter 11 filing.

Munis Go Bust

As far as defaults go, most are by community-development districts in Florida, on bonds that were used to finance real- estate projects during the property boom. In 2009, a total of 122 of these districts defaulted on $3 billion in bonds, almost half of the $6.4 billion in munis that went bust.

One of the newer, non-Florida defaults was reported by the Colorado Educational Facilities Authority, which acts as a conduit for certain muni-bond issues, on June 15.

The Rocky Mountain Roller Hockey League Inc., it said, failed to make payment on $1.8 million in bonds that were sold in 2003 and used to finance the construction of an “indoor, inline hockey facility” near the city of Lakewood, Colorado, as the original official statement to the bonds put it.

Thus far, there are no real surprises among the shipwrecks in the municipal market, with the possible exception of Harrisburg, Pennsylvania’s capital. The city in February defaulted on bonds used to build a waste-to-energy incinerator and is considering bankruptcy or state oversight.

‘Not an Option’

People are talking about municipal bankruptcy more than ever. So far, they haven’t embraced the concept. There still seems to be a stigma attached to it.

“Bankruptcy is not an option,” Jay M. Goldstone, the chief operating officer of the city of San Diego, said in a message to investors on June 18. “The city is facing challenges in uncertain times but has taken and will continue to take the critical steps necessary to meet those challenges.”

The numbers suggest it’s business as usual in the municipal market. In other words, there are isolated incidents of failure rather than any kind of systemic collapse.

Consider Buena Vista, Virginia. The city failed to appropriate money to pay debt service on some bonds it sold to build a golf course in 2005.

“Failure to appropriate demonstrates uncertainty about the city’s willingness to meet its obligations,” Moody’s Investors Service said in downgrading the city.

Unable, Unwilling

This is a cardinal sin in Muniland, where being unable to pay is one thing, not being willing quite another. Yet unwillingness to pay hasn’t gone viral, as the numbers show.

One money manager says a wave of municipal bankruptcies is unlikely. That’s not going to keep people from talking about it.

“While we recognize there may be an increase, the percentage will still be low compared to the vast universe of municipal bond issuers,” said John Flahive, Boston-based national director of fixed income for BNY Mellon Wealth Management, which manages about $20 billion in municipal bonds.

“We are cautioning clients that Chapter 9 filings will be a more frequently discussed option and that will lead to continued skittishness toward municipal bonds,” Flahive said.

Defaults and bankruptcies are down this year. The question for investors is: Is this a sign that states and municipalities are just beginning to recover, as they are bound to at some point? Or is this drop only the result of federal stimulus dollars delaying the day of reckoning?

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

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