Wall Street Pounces on Distressed Muni Deals

As conditions in the corporate bond market improve—limiting potential gains for bottom-fishing investors—private equity firms and Wall Street banks are seizing opportunities in the $28 billion market for distressed municipal bonds. The investors are using a strategy borrowed from the corporate bond world known as "loan to own," which involves buying debt to gain control of revenue-producing municipal projects.

Citigroup (C) took over St. Louis's Renaissance Grand Hotel & Suites in December when it purchased revenue bonds backed by the 1,000-room hotel after lenders foreclosed. Fundamental Advisors, a New York private equity firm, took control of the Memphis Redbirds minor league baseball franchise and the team's AutoZone Park after buying its tax-exempt debt.