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Defaults Falling to 3-Year Low Prove Whitney Wrong: Muni Credit

Banking Analyst Meredith Whitney
The turnaround is helping drive the local-debt market to a fourth straight year of gains while running counter to banking analyst Meredith Whitney’s projection in December 2010 of “hundreds of billions of dollars” of defaults within a year. Photographer: Graham Morrison/Bloomberg

Defaults in the $3.7 trillion U.S. municipal-bond market are poised to fall below 100 this year for the first time since at least 2009, driven by a drop in failures among real-estate borrowings in Florida.

Land-backed securities, the riskiest part of the tax-exempt market, have recovered as defaults in Florida have dropped by half since 2010, according to Matt Fabian at Concord, Massachusetts-based Municipal Market Advisors. Home prices in the fourth-most populous state are rising after a foreclosure crisis peaked in 2010.

The turnaround is helping drive the local-debt market to a fourth straight year of gains while running counter to banking analyst Meredith Whitney’s projection in December 2010 of “hundreds of billions of dollars” of defaults within a year.

“There has been a bit of a washing out of the weaker deals,” John Miller, who helps manages $86.5 billion of munis as co-head of fixed-income in Chicago at Nuveen Asset Management, said of Florida land-secured debt. “The prices of the homes have adjusted to the point where people are feeling a little bit more optimistic.”

Whitney didn’t respond to an e-mail seeking comment. A woman who answered the phone at Meredith Whitney Advisory Group in New York said the analyst was out of the country and unavailable. Whitney made her default remarks on CBS Corp.’s “60 Minutes.”

Fiscal Turn

Even with three California municipalities filing for bankruptcy since June, the muni market is seeing improving fiscal health. Sixty-three issuers have defaulted this year as of Oct. 16, down from 81 in the same period in 2011, according to Fabian, a managing director at MMA.

Tax-exempt debt has gained 6.8 percent this year and is poised to advance for a fourth consecutive year, the longest stretch since 2007, Bank of America Merrill Lynch data show. Treasuries have gained 1.4 percent.

In Florida, community-development districts can sell tax-exempt debt secured by land to help finance real-estate projects. Bondholders are repaid from special assessment fees that are the obligation of the developer.

Bondholders aren’t receiving principal and interest payments on about $13 billion of muni debt, from 410 defaults, as of Oct. 16, MMA data show. Land-secured borrowings, including debt sold by the development districts, account for 193 of the filings, the most by number, according to Fabian.

Few Left

Still, fewer defaults by Florida’s districts have pushed down failures. Including the Florida bonds, the rolling 12-month average of first-time muni defaults has dropped to 100 this year from 200 in mid-2010, Fabian wrote in a report this month. Excluding the Florida debt, the average has stayed at about 100 since at least 2010.

Florida dirt bonds are defaulting less partly because most have already failed, Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida, said in an interview.

The state’s housing market is also improving and many real-estate developments in Florida are seeing increased demand, said Miller at Nuveen, whose holdings include $770 million of Florida community-district development bonds.

Price Rebound

Florida is one of nine states that Standard & Poor’s assigns its highest general-obligation credit rating.

The average sales price on a single-family home in Florida this year was about $220,000 as of Sept. 15, up 5.8 percent from the same period of 2011, Florida Realtors data show. The average price reached more than $300,000 in May 2008.

About 17.5 percent of Florida homes were in foreclosure or delinquent by at least 90 days as of June 30, down from a record 20.6 percent in March 2010, according to Mortgage Bankers Association data.

Developments that are near metropolitan areas like Miami or Orlando, that don’t have a lot of debt and that are already built out can be a good investment, Miller said. He and his team have traveled to Florida to see such districts.

“Both institutional portfolio managers and individual investors are starting to figure out that some of these projects have made it or are going to make it and some have nice high cash flow,” Miller said.

Restructurings Seen

Some projects that fell into bankruptcy or payment default are in development again because of new landowners or investment capital, Fabian said.

“After years of seeing no movement at all, we’re finally seeing restructurings,” Fabian said.

Lakes by the Bay South Community Development District sold about $23 million of tax-exempt special-assessment bonds in March to help finance a development called Isles at Bayshore, in Miami-Dade County. The project is set to include about 2,300 housing units, with 78 percent already built and sold, according to offering documents.

A security due in 2042 traded Oct. 11 as high as 104 cents on the dollar, up from 95.17 cents when it first sold in March, data compiled by Bloomberg show. Nuveen held about $5 million of the debt as of Aug. 31, data compiled by Bloomberg show.

In the muni market yesterday, yields on benchmark 10-year tax-exempts rose about 0.02 percentage point to 1.68 percent, a Bloomberg index shows. The index dropped to 1.63 percent on July 27, the lowest since it began in January 2009.

Following are pending sales:

NEW JERSEY plans to sell $2.6 billion of general-obligation tax-and revenue-anticipation notes through competitive bid as soon as Oct. 30, data compiled by Bloomberg show. It’s the state’s largest short-term note deal, the data show. (Added Oct. 19)

CALIFORNIA plans to sell about $550 million in general-obligation refunding bonds as soon as Oct. 23, according to the state treasurer’s website. The debt will be sold via auction. (Added Oct. 15)

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