Whitney Gets One Out of Billions Right With Wrong Market Call: Muni Credit
Brighton, Alabama, a city of 2,945 near Birmingham, stands out as the only U.S. municipality to miss a general-obligation debt payment in 2011, less than a year after Meredith Whitney predicted “hundreds of billions of dollars” of defaults.
Instead, defaults this year are about a quarter of the $4.3 billion tally in 2010, according to Bank of America Merrill Lynch research. Municipal debt has returned 9.1 percent in 2011, beating Treasuries’ 8.2 percent, with tax-exempt yields close to the lowest in more than two years, the bank’s index data show.
To make sure they have money to pay their debts, municipalities nationwide are selling assets, cutting employees and slashing capital spending. Seven straight quarters of growing state and local-government tax revenue are also easing fiscal strain in the $2.9 trillion municipal-debt market.
“We just haven’t seen the uptick” in defaults, said John Hallacy, Bank of America Merrill Lynch’s head of municipal research in New York. “Municipalities have to balance their budgets and make hard decisions. A lot of them care about their ratings because they want market access.”
From California to Massachusetts, states, cities and other local borrowers are set to sell about $67 billion of long-term debt this quarter, according to data compiled by Bloomberg. It’s the first time since at least 2003 that third-quarter offerings will rise from the prior three months.
Whitney, the banking analyst who predicted Citigroup Inc.’s 2008 dividend cut, said on “60 Minutes” on Dec. 19 that there would be “hundreds of billions of dollars” of municipal defaults within 12 months.
Data from Hallacy, Standard & Poor’s and Municipal Market Advisors show the opposite.
Debt-service payment defaults this year are the equivalent of 0.64 percent of municipal-bond sales, compared with 0.99 percent for 2010, Hallacy wrote in a report last week. About 99 percent of the defaults have been revenue bonds. Health-care accounted for the biggest chunk, at 39 percent. Hallacy included monetary defaults or missed payments to investors in his tally.
The largest default for 2011 is the Clare at Water Tower, a 53-story apartment building for retirees in Chicago with about $229 million of long-term debt, according to Richard Lehmann, publisher of the Distressed Debt Securities Newsletter in Miami Lakes, Florida.
Brighton is in Jefferson County, which avoided becoming the biggest U.S. municipal bankruptcy on Sept. 16 when it provisionally agreed to a restructuring of $3.14 billion of sewer debt. The city, about 12 miles (19 kilometers) from Birmingham, lost 19 percent of its residents from 2000 to 2010, and had an estimated household median income of $26,458 in 2009, according to U.S. Census data. That compares with about $41,000 for the rest of the state.
The city is the only general-obligation issuer to default this year, according to Matt Fabian at MMA, a financial-research company based in Concord, Massachusetts.
Brighton told investors in the $1.12 million of general- obligation warrants it sold in 2003 that it missed a $22,783 interest payment and $35,000 principal repayment Aug. 1 “due to lack of funds,” according to an Aug. 3 notice by Hazel Williams, the acting clerk.
Williams referred questions to Mayor Angelo Hinkle. Hinkle didn’t immediately respond to telephone messages left at City Hall and with Williams.
Whitney, speaking Sept. 27 at the Council of Institutional Investors conference in Boston, stood her ground.
“I would say nothing different from what I said” in December, she said in response to a question from the audience. “You have evidential examples to point to across the board, from those states that cut programs, from those states that cut jobs.”
Whitney also said she never specified a “definitive timeline” for the amount of defaults.
To reduce deficits, local governments have cut 550,000 jobs in the past three years. Half of cities cut or froze employee pay in 2011, 31 percent fired workers and 30 percent cut health- care benefits, the National League of Cities said this week, citing a survey of municipal officials. Three out of five municipalities delayed or canceled “capital infrastructure projects,” the survey said.
Following is a description of a pending sale of municipal debt:
OKLAHOMA TURNPIKE AUTHORITY, which oversees 605 miles of roadway in the state, is set to borrow $522 million as soon as next week to refinance debt. The sale is rated AA- by S&P, its fourth-highest grade. RBC Capital Markets will lead a syndicate of banks on the deal. (Added Sept. 29)
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