Municipal borrowers defaulted at three times the typical rate even as the pace fell from records the past two years when Jefferson County, Alabama, and Lehman Brothers Holding Inc.’s failure sustained historic levels.
Thirty-five municipal bond issues totaling $1.5 billion defaulted in the first six months of 2010, the Miami Lakes, Florida-based Distressed Debt Securities Newsletter reported in its July edition. That annualized $3 billion pace is triple the rate of $1 billion or less a year going back to 1983, Richard Lehmann, publisher of the newsletter, said in a phone interview today.
“I wouldn’t start celebrating just yet,” said Lehmann. “I wouldn’t think things are getting better. A lot of issuers are on the brink.”
At least 60 so-called dirt districts in Florida with about $1 billion of debt that may default have managed to stay afloat because of reserve funds, Lehmann said. The “dirt bonds” finance infrastructure for housing developments, and districts in California, Arizona and Nevada continue to struggle with lower revenue and costs they can’t control, he said.
New defaults this year include Crawfordsville, Indiana, which missed a July 1 payment on a $16.6 million debt issue sold to build a high-speed Internet system and the Carter Plantation Community Development District in Louisiana, which missed a May 1 payment on a $23.5 million bond issue for a golf resort, according to the newsletter.
Last year, 194 municipal borrowers defaulted on $6.9 billion of bonds, compared with 162 issues totaling $8.2 billion in 2008.
High levels of defaults in those years were led by Jefferson County, which is trying to restructure more than $3 billion of sewer debt after almost being bankrupted by it during the credit crisis, and Main Street Natural Gas Inc. in Georgia, which failed to pay after Lehman Brothers, which backed its bonds, sought bankruptcy protection, Lehmann said.
The cost of insuring against default on July 15 fell to $222,890, the annual sum of buying protection on $10 million of municipal bonds for five years, from $266,500 on June 30, the highest level since March 2009, according to an index of swaps for 50 local government issuers.